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US banks seen boosting shareholder payouts by US$30b despite stress tests

They have been raising their dividends and buybacks in recent years as they reached sufficient capital levels

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JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc are likely to distribute more than 100% of their profits in the next four quarters, according to estimates.

New York

HARSHER Federal Reserve stress tests this year won't stop US banks from increasing their payouts to shareholders.

As the annual review gets under way this week, the 25 largest lenders are gearing up to announce dividends and buybacks totalling roughly US$30 billion more than last year, representing a 25 per cent increase, according to analysts' estimates compiled by Bloomberg.

JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc are likely to distribute more than 100 per cent of their profits in the next four quarters, according to the estimates. Goldman Sachs Group Inc and Morgan Stanley might not be so lucky. Their earnings are more closely linked to capital markets, which suffer more under the tougher macroeconomic scenario in this year's test.

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After years of rebuilding capital buffers by holding on to most of their profits, the largest US banks have been boosting their dividends and buybacks in recent years as they reached capital levels the Fed found sufficient.

For the first time since the tests were introduced in 2009, all the banks passed last year as they adjusted to regulators' expectations for the exercise and as regional banks were exempted from the toughest portion. This year's average payout ratio will rise to about 96 per cent for the 25 largest banks from 89 per cent in 2017, analysts estimated.

The Fed has proposed easing the tests for regional banks further in the coming years, which could create more opportunities to boost shareholder returns. "The tougher scenarios in this year's test are holding back the banks' payout plans a bit, or they would have been much more aggressive," said Kevin Barker, an analyst at Piper Jaffray & Co.

Six new banks are part of this year's exercise because the largest foreign lenders operating in the US were required to consolidate their units in the country under umbrella holding companies that must participate in the tests. Analysts said some of those might fail because they're still unfamiliar with the Fed's data demands. Analysts don't estimate their payout figures because they send dividends back to parent companies based in Europe, Asia or Canada, not to owners of publicly traded stocks directly.

Those six companies are the US units of BNP Paribas SA, Barclays Plc, Deutsche Bank AG, Credit Suisse Group AG, Royal Bank of Canada and UBS Group AG. The custodian banking subsidiary of Deutsche Bank in the US was taking part in previous exercises and failed in the last two years.

Failing the tests means foreign banks can't return profits to parent companies, and have to retain them in their US units as capital. HSBC Holdings Plc said last week its US unit was able to send dividends to the parent company last year for the first time since 2006.

Deutsche Bank's consolidated US unit was added to a group of troubled lenders the Fed monitors because its risk controls were found insufficient, similar to the reasons its custodian unit was failing the test. Mistakes that included transferring billions of dollars to wrong accounts have been seen as symptoms of weak risk management, even as the US business's capital levels far exceed minimums.

Among the six biggest US banks, Bank of America might see one of the steepest jumps in payouts, according to estimates by Keefe, Bruyette & Woods, Jefferies Group LLC, Atlantic Securities Inc, Royal Bank of Canada and Sanford C Bernstein & Co.

The firm's cash return to shareholders is expected to be about US$28 billion over the next four quarters, 23 per cent more than in the previous four, the estimates show.

Wells Fargo & Co is still the wild card because it's been unable to shake off scandals related to customer service. The bank could fail the part of this year's tests that assesses risk controls, RBC analysts said in a June 4 note. RBC forecasts a lower payout figure for Wells Fargo while the other four analysts' estimates are for an increase.

The scandals prompted the Fed to restrict Wells Fargo's growth until the bank fixes its missteps. With no means of expanding its balance sheet, the company is generating capital it can't put to use. That suggests it might surprise with a bigger payout ratio even as several analysts expect it to fail the test, Piper Jaffray's Mr Barker said.

The Fed will release results of the tests in two stages. The first, the quantitative part on June 21, will show the impact of hypothetical scenarios on banks' capital levels. On June 28, the Fed will say whether any firm failed because of either insufficient capital or on qualitative grounds, which include risk management, data collection and other processes. BLOOMBERG

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