Morgan Stanley, Goldman Sachs, Bank of America and Wells Fargo all raised their dividends on Monday after US banks passed their annual stress testing exercise last week.
The US Federal Reserve said Thursday that the nation’s largest lenders could easily weather a severe economic downturn, giving them good health and paving the way for them to redistribute excess capital to shareholders.
The results allowed banks to announce higher dividends even though the Fed’s test was tougher than in 2021, pushing up capital buffers required by some lenders more than expected.
However, JPMorgan & Chase and Citigroup held their pay steady as a challenging economic environment may require more capital. Citi is likely to provide an update on its capital plans at its next earnings on July 15, a source familiar with the situation said.
This year’s dividend increases were more muted than in 2021, a bumper year for big bank principal payments, after lenders hoarded mounds of excess cash during the pandemic to cover credit losses that never materialized. Morgan Stanley, for example, doubled its dividend in June 2021.
Under the annual stress test exercise established after the 2007-2009 financial crisis, the Fed assesses how banks’ balance sheets would fare in the face of a hypothetical severe economic downturn. The results dictate how much capital banks need to be healthy and how much they can return to shareholders.
Goldman Sachs said on Monday it would increase its dividend by 25% to $2.50 a share, and Morgan Stanley said it plans an increase to 77.5 cents a share and a $20 billion share buyback program. Bank of America increased its dividend by 5% to 22 cents a share and Wells Fargo said it expects to increase its dividend to 30 cents from 25 cents a share.
Morgan Stanley shares rose 3.5% after hours, while Goldman shares rose 1.4%.
JPMorgan kept its dividend at $1.00 per share, citing “higher future capital requirements.” Citi also said it would be able to hold it steady at 51 cents “under a variety of stress scenarios.”
The test establishes each bank’s “stress capital buffer,” an additional capital cushion on top of the regulatory minimum. The size is determined by the hypothetical losses of each bank under test.
Banks announced their new stress capital buffers (SCBs) on Monday, which will come into effect later this year, giving them time to reorganize their balance sheets.
Citigroup, JPMorgan and Bank of America said their stress capital buffer would increase, confirming analyst expectations. At Bank of America and JPMorgan, that increase would be driven by higher loan provisions, while Citi would be hit by higher trading losses, lower fee income and higher expenses, analysts said based on the test results.
“Each of these banks experienced an estimated SCB increase of 80-100 bps, relative to capped excess capital, which is greater than we or the market anticipated,” Goldman Sachs analysts wrote on Friday, after the results of the stress test were announced.
As a result, analysts expected those three banks to keep dividends steady and eliminate or reduce share buybacks to raise capital.
Gerard Cassidy, head of US bank equity strategy at RBC Capital Markets, said Monday ahead of the banks’ announcements that rising loan growth and accounting losses that banks have taken on banks’ bond portfolios due to interest rate hikes have put pressure on banks. ‘ capital.
“Clearly it’s going to be different this year than it was last year for those reasons,” he added.
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