Giant US banks are preparing to return $80 billion to shareholders after the Federal Reserve’s stress tests this year, down from last year’s high that followed the pandemic-induced repo halt in 2020.
JPMorgan Chase is set to lead the group of banks with $18.9 billion in consolidated dividends and share buybacks, even with significant capital outlays, for the largest US lender this year.
Bank of America and Wells Vago are expected to pump $15.5 billion and $15.3 billion, respectively, according to data compiled by Bloomberg based on estimates provided by analysts at Barclays.
“Because the banks didn’t buy back shares during Covid, buying was very high last year, so I reduced the surplus capital,” Barclays analyst Jason Goldberg said. “We are certainly in a period of increased economic uncertainty, and at the same time we are already seeing very good opportunities for loan growth,” he added.
Annual tests force banks to think about a hypothetical crisis and estimate the losses they might face based on their business books. Banks use these numbers to assess how much capital they can return to investors. The results of this year’s tests will be released Thursday, while banks will reveal their capital plans in the coming weeks.
And last year, dividend payments by the 6 largest banks on Wall Street nearly halved after the country’s largest banks amassed mountains of excess cash during the pandemic. Morgan Stanley alone doubled its quarterly payments, while also announcing up to $12 billion in share buybacks.
This makes comparison difficult this year. Banks are also grappling with concerns that historical levels of inflation and central banks’ efforts to tame it will limit economic growth. This was exacerbated by the Russian invasion of Ukraine, which sparked geopolitical uncertainty around the world.
Citigroup CEO Jen Fraser said: “Like many of our peers, we expect to have a moderate share buyback program due to the uncertainty in the macro environment.”
The severely opposite scenario this year for the Federal Reserve includes a severe global recession accompanied by a period of increased stress in the commercial real estate and corporate debt markets, according to the Fed’s website. Referring to the impact of the pandemic, the hypothetical downturn “is amplified by the continuation of remote work for extended periods, which leads to lower commercial real estate prices further, which in turn extends to the corporate sector and affects investor sentiment.”
The scenario presents a peak unemployment rate in the US of 10%, a real GDP drop of 3.5% from the end of last year, and a 55% drop in stock prices. It also includes a sharp drop in inflation to an annual rate of 1.25% in the third quarter of 2022 due to high unemployment rates and low demand.
Historically, these tests will spark frustration and anxiety across Wall Street and the Fed will eventually have to sign off on the lenders’ capital plans. Now, the vast majority of banks are passing their plans separately after becoming more familiar with the exercises and no longer needing Fed approval as long as they remain above their specified minimum capital.
In turn, Credit Suisse analyst Susan Katzky wrote in a note to clients, “There may be more stress, but there will have to be a significant capital surplus to make this manageable, at scale and in the context of our projected payments, driven by growth in Balance sheet and less funds allocated to non-performing loans compared to last year.