Banking giants in the US are set to return to the shareholders around $80 billion after the Fed stress tests this year, which was lower compared to last year’s elevated levels caused by the pandemic and resultant pause on buyback.
According to Bloomberg News, JPMorgan & Co is leading the banks to buy back shares and dividends worth $18.9 billion. Wells Fargo, along with Bank of America, is planning to return $15.3 Billion and $15.5 billion, per estimates provided by Barclays Plc. Analysts and compiled by Bloomberg data.
Jason Goldberg, an analyst with Barclays Plc., said in an interview that banks did not buy stocks last year during Covid as the prices were elevated. Right now, there is economic uncertainty but also an opportunity at the same time to see good growth in loan books.
Lower Returns
The banks face exams annually on the hypothetical crisis and estimate how much loss they suffer in their business books. The bank assesses how much capital it can give out to investors. While the stress test results will be out this Thursday, the banks will release their capital plans in the coming weeks.
Last year the six largest lenders of the US dividend payout increased by more than 50% after the largest banks amassed massive excess cash they had accumulated during the pandemic. Morgan Stanley doubled its quarterly payout and announced a $12 billion stock buyback.
This year the comparison becomes tough. Banks are also dealing with unprecedented inflation levels and Federal Reserve efforts to tame them with fear of limited economic growth. The Ukraine invasion by Russia has sparked geopolitical uncertainties and compounded the problems.
Citigroup CEO Jane Fraser told investors in April that due to uncertainties in the macro-environment, the bank is expected to have a moderate buyback program in 2022.
The Fed envisaged adverse scenario includes severe economic recession accompanied by heightened stress in corporate debt markets and commercial real estate. Prolonged work from home has led to a decline in commercial real estate demand, impacting investors‘ sentiments.
The scenario also includes the US employment rate reaching a peak of 10%, a GDP decline of 3.5% from the previous year, and a 55% price drop in Equity. It also includes a sharp decrease in inflation by a 1.25% annual rate in the 2022 third quarter due to lower demand and higher unemployment.
The annual test would historically frustrate Wall Street, leading to anxiety across Wall Street and forcing the Fed to sign off the capital plans of lenders. With most of the banks now familiar with the exercise, they pass the test and do not need the approval of the Federal Reserve as long as they comply with the minimum capital adequacy norm.
Susan Katzke, an analyst with Credit Suisse, says that despite more stress, there is huge excess capital to make it manageable.
