Big­gest US banks pass Fed stress tests

Lenders quick to raise div­i­dends and buy back shares

The National - News - Business - - Inside Track -

The US Fed­eral Re­serve has given the green light to all 34 of the big­gest banks in the coun­try to raise their div­i­dends and buy back shares, judg­ing their fi­nan­cial foun­da­tions sturdy enough to with­stand a ma­jor eco­nomic down­turn.

It was the first time in seven years of an­nual “stress tests” that ev­ery bank as­sessed by the Fed won ap­proval for its cap­i­tal plans. All have at least US$50 bil­lion (Dh184bn) in as­sets. On Wed­nes­day, the Fed an­nounced the re­sults of the sec­ond round of its an­nual stress tests. Those al­lowed to raise div­i­dends or re­pur­chase shares in­clude the four big­gest US banks – JPMor­gan Chase, Bank of Amer­ica, Cit­i­group and Wells Fargo.

Cap­i­tal One’s plan only got con­di­tional ap­proval and it has six months to up­grade it. But the bank was al­lowed to re­turn prof­its to share­hold­ers. Af­ter the re­sults were made pub­lic, the banks jumped in with an­nounce­ments of div­i­dend boosts and share buy-back plans. They in­cluded a dou­bling of Cit­i­group’s div­i­dend, a 60 per cent div­i­dend in­crease by Bank of Amer­ica and a 12 per cent step up for JPMor­gan.

Cap­i­tal One, be­cause of its con­di­tional sta­tus, opted to keep its div­i­dend at its cur­rent level, but is plan­ning a share re­pur­chase.

The sec­ond part of the sev­enth yearly check-up tested the banks to de­ter­mine if their cur­rent plans for pay­ing out cap­i­tal to share­hold­ers would still al­low them to keep lend­ing if hit by an­other fi­nan­cial cri­sis and se­vere re­ces­sion.

With the 34 banks hold­ing more than three quar­ters of total as­sets of all US fi­nan­cial com­pa­nies, the re­sults showed strength in an in­dus­try that nearly top­pled the world fi­nan­cial sys­tem – and has re­cov­ered nearly nine years on from the 2008-09 cri­sis. Now the banks have about $1.2 tril­lion in cap­i­tal re­serves as of the fourth quar­ter of last year, an in­crease of $750bn over the start of 2009, in the depths of the cri­sis, ac­cord­ing to the Fed. They are ex­pected to pay out to share­hold­ers nearly 100 per cent of net rev­enue over the next four quar­ters, com­pared with 65 per cent in the same pe­riod last year.

“They can now more freely pay out div­i­dends and buy back stock with­out wor­ry­ing whether they are re­silient in a fi­nan­cial cri­sis,” said David Wright, a man­ag­ing di­rec­tor at Deloitte who for­merly worked on bank su­per­vi­sion at the Fed.

“I don’t think they [the Fed] are quite ready to de­clare vic­tory, though,” he said. “Some of the smaller firms still strug­gled to iden­tify risks.”

Jerome Pow­ell, the Fed’s governor, said the re­serve bank’s as­sess­ment of banks’ cap­i­tal plans in light of their re­serves “has mo­ti­vated all of the largest banks to achieve healthy cap­i­tal lev­els, and most to sub­stan­tially im­prove their cap­i­tal plan­ning pro­cesses”.

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