Biggest US banks pass Fed stress tests
Lenders quick to raise dividends and buy back shares
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”.