Giant Banks Increase Dividends Following Successful Federal Reserve Stress Test

Giant Banks Increase Dividends Following Successful Federal Reserve Stress Test
Credit: Clayton

In a display of strength that highlights the disparity between major banks and smaller regional competitors, five of the largest US banks have announced their plans to distribute more cash to shareholders. This decision comes after passing their Federal Reserve stress tests earlier in the week.

JPMorgan Chase (JPM), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS), and Citigroup © have each unveiled their intentions to raise quarterly dividends. The dividend increases range from 2 cents to 25 cents, with Goldman Sachs’ increase being the highest and Citigroup’s the lowest.

Moreover, these banks have also emphasized the positive outcomes of their regulatory examinations. The Federal Reserve released the results on Wednesday, evaluating whether 23 financial institutions would be able to endure a severe global recession marked by a 10% unemployment rate and a 45% decline in the stock market.

Notably, banks were prohibited from distributing cash to shareholders until they obtained a passing grade on the stress test.

On Friday, Morgan Stanley’s CEO, James Gorman, commented on the results, stating, “These results demonstrate the durability of our transformed business model.” Similarly, Citigroup’s CEO, Jane Fraser, highlighted the financial resilience of the institution. Goldman Sachs CEO David Solomon pleased with progress in reducing capital intensity, highlighting positive business transformation.

JPMorgan’s CEO, Jamie Dimon, who oversees the largest bank in the United States, stressed that the stress tests showcased the resilience of banks and their continued role as a pillar of strength for the financial system and the broader economy.

In contrast, Bank of America (BAC), the second-largest bank in the country, made no announcements on Friday.

US bank stocks concluded June with significant gains, reaching their highest point in months. The KBW Bank Index closed on Friday with an increase of over 5%, while the KBW regional bank index rose by 3%.

Although several regional banks successfully passed the Federal Reserve’s stress test, none of them announced dividend increases on Friday. This includes PNC (PNC) and US Bancorp (USB). Truist (TFC) stated that it would maintain its current dividend. Many regional banks concluded the Federal Reserve examination with smaller buffers compared to their larger counterparts.

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The Federal Reserve determined that Citizens Financial (CFG), a regional bank headquartered in Rhode Island, possessed the lowest capital buffer.

Citizens Financial released a statement on Friday, reaffirming its commitment to repurchasing $1.3 billion in stock but made no mention of a potential dividend payout. Citizens Financial CFO John Woods pleased with stress test results, highlighting strong capital position. Additionally, our company-run stress test results suggest a significantly lower capital drawdown than the Federal Reserve’s models.”

On the other hand, Charles Schwab (SCHW) emerged as one of the lenders subjected to increased investor scrutiny amidst the industry’s challenges. Notably, the company achieved the highest capital ratio in the Federal Reserve’s “severely adverse scenario.” Peter Crawford, Chief Financial Officer of Charles Schwab, stated on Friday, “As regulatory expectations and capital requirements evolve, we are committed to updating our capital planning and management priorities accordingly.”

Despite successfully passing the stress tests, banks are preparing for new, stricter capital requirements from the Federal Reserve. These regulations will compel some banks to maintain even greater buffers against potential losses.

Although these more stringent rules were already in development before the collapse of several regional banks earlier this year, regulators have made it clear that they want to ensure their new approach applies to mid-sized institutions of similar scale to First Republic or Silicon Valley Bank, both of which experienced failures this spring. At the time of their collapses, both banks had assets exceeding $200 billion.

Wells Fargo banking analyst Mike Mayo advised investors, stating, “It seems safe to invest after this stress test, but remain cautious as two more regulatory waves are on the horizon.”

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