American investors hope for higher payouts

US bankers remain optimistic ahead of Fed stress results

Investors are hoping the Federal Reserve will allow big US banks to put an estimated $ 150 billion in idle capital toward stock buybacks, dividends and profit- boosting investments in the coming weeks after conducting a regular examination of financial strength.

On Thursday, the Fed is scheduled to begin releasing results from its two- part annual stress test, adopted in response to the financial crisis, in order to gauge banks’ ability to weather an economic storm that could threaten the stability of the system. The results will be the first since Republican President Donald Trump took office.

Trump has not yet made any appointments to the Fed, but Republicans have turned up pressure on the central bank to cut red tape and ease regulations. Wall Street analysts said they will be parsing language the Fed uses in presenting the results for any signs that its ap- proach is starting to soften.

Analysts say they do not expect the Fed to announce any explicit changes to the stress test, but they do expect higher payouts. According to their estimates, the Fed could allow banks to distribute nearly as much capital to shareholders over the next year as they generate in profits, a benchmark not hit since before the 2008 crisis.

Higher payouts “would be significant from a signaling standpoint”, indicating that regulators are easing up on capital requirements, said Steven Chubak, a bank analyst at Nomura Instinet. “That is a key part of the value case for a lot of these stocks,” he continued.

Banks going through the stress tests have roughly $ 150 billion more capital than they need, Betsy Graseck, analyst at Morgan Stanley, estimates. She expects the typical big banks to be allowed to increase stock buybacks by 27 percent and dividends by 8 percent, for a combined capital payout of 95 percent of annual earnings, up from 84 percent last year.

The Fed first conducted stress tests in 2009 as a way to boost confidence in the financial system.

However, bankers complain that stress tests have morphed into an overly complex and time- consuming process that occurs in the secrecy of a black box.