Financial Results

US Banks Raise Dividends After Fed's Stress Tests

Tom Burroughes, Group Editor, London, 29 June 2022


Four of America's largest lenders say they will boost dividends following the Federal Reserve's stress test results. The Fed has been checking on the health of financial firms to assess how they would handle a recession – which some economists say is likely.

(An earlier version of this story appeared yesterday on Family Wealth Report, sister news service to this one.)

The largest US banks – all of them with wealth management operations – are to pay more money to shareholders after getting a clean bill of health over their financial strength from the US Federal Reserve.

Goldman Sachs said it will raise its dividend to $2.50 a share from $2.

The financial sector is bracing for a potential recession amid worries about rising inflation and interest rates, the havoc wrought by the pandemic and surging energy costs.

“Supported by the movement towards more durable revenues, the firm’s capital plan includes an increase in the common stock dividend from $2.00 to $2.50 per share (subject to approval by the firm’s board of directors at the customary third quarter meeting),” Goldman Sachs said in a statement earlier this week. 

“Our client-oriented strategy will continue to diversify the firm’s franchise and provide a strengthened return profile,” chairman and CEO David Solomon said. “We will continue to dynamically manage capital and remain well positioned to support our clients.”

Goldman Sachs, Morgan Stanley, Wells Fargo and Bank of America – are to boost dividend payments. The Wall Street Journal (27 June) noted that this equates to a 15 per cent rise in pay-outs and that this was relatively modest compared with a year ago.

Last week, the Fed said that 34 of the largest banks had sufficient capital to withstand a crisis, a necessary hurdle for banks to clear to return money to shareholders. Such stress tests have become the norm in the aftermath of the 2008 financial crash, which was followed by expensive and politically controversial bailouts in the US and Europe.

In its press statement on the stress test results, JP Morgan made no reference to changes in dividends that this publication could identify. The WSJ said JP Morgan held its dividend at $1 per share, citing higher capital requirements in the future.

Morgan Stanley said it will hike its dividend to 77 cents a share, rising 11 per cent from the pay-out last year. The firm also announced a “new multi-year common equity share repurchase programme of up to $20 billion”, with no set expiration date, beginning in the third quarter of 2022. 

“We are pleased to continue our robust capital return programme, which is driven by our business transformation, especially the durable earnings from our wealth management and investment management businesses,” James Gorman, chairman and chief executive, said in a statement. “The strength and stability of our franchise and our capital cushion provide us the flexibility to continue to invest for future growth while also returning capital to shareholders.”

Bank of America said it had raised its dividend by a penny to 22 cents a share, starting from the third quarter of 2022. The bank also said it had $17 billion remaining under an existing buyback programme as of the end of March.

Based on the stress test results, the bank's “stress capital buffer” will be about 100 basis points higher than the current 2.5 per cent. At 31 March, Bank of America had $170 billion of regulatory Common Equity Tier 1 capital, translating to a ratio of 10.4 per cent.

“Our responsible growth strategy over the last decade has put us in a strong position to support our clients and deliver for shareholders,” BoA’s chair and CEO Brian Moynihan said. “In October 2021, we renewed the company’s previously-announced $25 billion common stock purchase programme with $17 billion remaining as of 31 March 2022, and today we are also announcing that we expect to increase the quarterly common stock dividend by 5 per cent to $0.22 per share.” 

Wells Fargo has hiked its dividend to 30 cents a share, rising 20 per cent. The bank also said it has “significant capacity” to buy back stock.

The bank said it expects its stress capital buffer to be 3.2 per cent – a percentage amount of incremental capital it must hold above its minimum regulatory capital requirements. 

“Wells Fargo remains in a strong capital position, as confirmed by this year’s CCAR stress test,” CEO Charlie Scharf said. “We are well-positioned to support our customers and communities, while also continuing to return excess capital to shareholders through dividends and share repurchases.”

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