Stand by for billions of dollars in share buybacks and higher dividends for 2023 from America’s biggest banks early Tuesday morning Sydney time after they survived their annual stress tests and were cleared to reward shareholders by their chief regulator, the Federal Reserve.
The Fed oversees 34 major lenders with more than $US100 billion in assets including well-known names like JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Morgan Stanley and Goldman Sachs. It also includes the 7 branches of some European majors such as Barclays, HSBC and BNP Paribas as well as one Japanese major.
The Fed said as a result of the stress tests America’s biggest banks and the US branches of those European majors are extremely healthy and able to withstand a huge slide in the stockmarket and a surge in bad debts.
The 34 US banks tested compared to 23 in 2021 – the 11 smaller banks are tested every second year, of which 2022 was the latest.
Passing the tests means the banks have surplus capital and can reward shareholders. They have to talk to the Fed and then announce their plans after 4.30pm Monday, New York Time.
Given the surge in inflation, rising rates and growing worries about a recession, it is likely the amounts to be paid out next year will be lower than expected by analysts and under 2021’s levels.
That will give us an early hint as to how these financial giants view the health of the US economy especially in 2023.
Analysts reckon JPMorgan will lead the group with dividends and buybacks of between $US19 billion to $US21 billion.
While down from 2021’s total of nearly $US30 billion, that figure included profits held over from 2020 during the depth of the Covid crisis when bank returns were crimped by regulators in the US and around the world.
Bank of America and Wells Fargo are next in line, with possible returns (estimated by analysts) of more than $US15 billion to nearly $US21 billion each, again much lower than last year.
Morgan Stanley follows, then Citigroup, and Goldman brings up the rear with estimated payouts of $US6 billion to nearly $US8 billion each.
The Fed’s stress tests for the impact of a “severe economic downturn” would see the 34 major lenders suffer a combined $US612 billion in losses, but they would still be left with roughly twice the amount of capital required under its rules, according to the Fed.
“Total losses were largely driven by more than $US450 billion in loan losses and $US100 billion in trading and counterparty losses,” the Fed explained in its statement.
“This year, larger banks saw an increase of over $US50 billion in losses compared to the 2021 test. Additionally, the aggregate 2.7 percent decline in capital is slightly larger than the 2.4 percent decline from last year’s test but is comparable to recent years,” the Fed added.
The annual “stress test” results determine how much capital banks need to be healthy and how much they can return to shareholders in the following year.
The 34 banks naturally suffered heavy losses in this year’s test, which was based on the US the economy contracting 3.5%, thanks in part to a slump in commercial real estate asset prices, and the jobless rate jumping to 10% – from well under 4% at the moment.
GDP fell sharply under the test along with the worsening in the jobless rate, “asset prices declined sharply, with a nearly 40% decline in commercial real estate prices and a 55% decline in stock prices,” the Fed said.
But even then, the Fed said aggregate bank capital ratios were still roughly twice the minimum amount required by regulators – more than 9% against the minimum of around 4.5%.
But the US arms of seven major European lenders including Deutsche Bank, Barclays and Credit Suisse though did better than the US rivals.
The Fed’s report shows they easily passed the stress tests with more capital than their US peers at the end of the severe economic slide.
The seven European bank subsidiaries the Fed oversees with more than $US100 billion in assets, saw their average capital ratio — a measure of the cushion a bank has to withstand potential losses — remain well above the regulatory minimum of 4.5%.
It was also higher than the average ratio for the broader group of the 34 major US banks.
Reuters said the average capital ratio for the seven European lenders was a huge 15.2% after the projected losses, compared with a solid 9.7% for the 34 US banks.
Reuters said that troubled Deutsche Bank’s US operations had the highest ratio of all banks at 22.8%, while Credit Suisse (a troubled Swiss giant) was the third-highest of the group with a ratio of 20.1%. HSBC was the straggler of the foreign pack with a ratio of 7.7%.
The other four European subsidiaries tested were UBS America Holdings, Santander Holdings USA, and BNP Paribas USA.
The dominant concern about bank shares for investors is that bad debts will hurt banks more than the obvious benefits from rising interest rates as the Fed tightens monetary policy by lifting the Federal Funds Rate.
The capital return decisions could help persuade American investors that bank shares are in fact sounder than the market thinks at the moment.