Fed Stress Tests Order Banks to Preserve Capital By Suspending Buybacks and Limit Dividends

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  • #23994
    The Bipolar Trader
    Participant

    The Federal Reserve completed its annual stress test…

    [article]2109[/article]

    #23996

    [color=purple][size=5][i]Excellent article & chockful of great info 🙂 — yes, conservation of resources are needed
    given economy & 20% of folks out of work & COVID-19 impacts[/i][/size][/color]

    #24006
    MoneyNeverSleeps
    Participant

    KBW Bank Index sank as much as 6.2% to lowest in a month. following Stress Test

    JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo all shed more than 5 per cent. Morgan Stanley was little changed and Capital One fell 2.2 per cent.

    The index has been hit hard so far this year by the pandemic crisis and lower interest rates, plunging 36 per cent versus a 6.3 per cent drop for the S&P 500.

    Wolfe Research, Steven Chubak

    “Investors hoping for a non-event got anything but” with the release of the stress test results, Chubak wrote in a note. He sees Morgan Stanley as the big winner, followed by Citigroup. Goldman’s results were the most disappointing, followed by JPMorgan and Capital One, with the dividend cap negative for Wells Fargo and Capital One.

    “While bank dividends appear largely safe for now, we would note that the group has not yet been given the ‘all clear’ as limitations will be revisited on a quarter by quarter basis,” he said.

    Morgan Stanley, Betsy Graseck

    The Fed will probably be “very hands on” until the economy stabilizes, which means the central bank can “pull the trigger on capital distributions more rapidly if needed,” Graseck wrote.

    With the Fed’s dividend “curve ball,” she expects Wells Fargo will trim its third-quarter dividend to 36c from 51c and that Capital One will eliminate its dividend from a prior 40c payment. She had expected Wells would cut to 30c in the fourth quarter. She also sees risk-weight assets (RWA) cuts at Goldman Sachs Group Inc.

    Cowen, Jaret Seiberg

    The Fed has put “the market on notice that dividends could be suspended or restricted more severely starting in the fourth quarter if bank losses grow and the economy gets worse,” Seiberg said.

    That’s likely to “disappoint all sides,” as “big bank critics will be upset that banks are able to pay any common dividends even though dividends make up less than 30 per cent of capital that is returned to investors. And the banks are likely to be upset that the sensitivity analysis for Covid-19 did not incorporate federal stimulus, which has been extensive.”

    Citi, Jill Shea

    “The biggest uncertainty comes with the requirement for banks to resubmit a new capital plan,” Shea said. She added that it’s unclear if new Fed analyses will impact the stress capital buffer (SCB) and capital ratio minimums.

    She sees Wells Fargo and Capital One as most at risk for near-term dividend cuts, while Goldman Sachs Group Inc. may face capital distribution limitations, although it can probably still maintain its dividend, “which implies the outcome is less negative than the headline number would suggest,” she said.

    Vital Knowledge, Adam Crisafulli

    “Banks will be on a much shorter leash going forward,” Crisafulli wrote, as the “industry will essentially be forced to resubmit their capital plans later this year and there will be updates conducted quarterly.”

    “On a positive note, the industry’s cumulative capital doesn’t breach the regulatory minimum even under the most stressed Covid scenarios,” he added.

    Odeon, Dick Bove

    “The Fed’s stress test indicates that this institution has serious questions concerning future bank earnings and capital,” Bove said. “It also indicates that a number of banks must sharply reduce their payouts. Uncertainty and lower yields is not the basis for rallying these stocks.”

    Capital Alpha, Ian Katz

    “The Fed’s tone had some heaviness to it, which must have weighed on investors,” Katz wrote.

    With requirements for resubmitting and updating capital plans to reflect current stresses, and added analysis each quarter, the Fed is “going to be keeping a very close eye on these banks going forward,” he said. “That wording is stern, but it shouldn’t be surprising given the state of the economy.”

    UBS, Saul Martinez

    “Results were mostly positive and stress capital buffer (SCB) shouldn’t be a capital constraint for most,” Martinez said, noting that all firms except Goldman had first-quarter CET1 (common equity tier 1) ratios above estimated minimums.

    “At first blush, the results are most positive for Citi (buy) and Citizens (buy) given lower bars,” and were positive for trust and regional banks, he said. There was also an improvement for Morgan Stanley, but capping the third-quarter dividend at the average of the last four quarters net income means Wells Fargo and Capital One may need to cut dividends. Extending the cap beyond the third quarter may “lead to lower dividend caps more broadly as trailing four quarter average net income falls.”

    RBC, Gerard Cassidy

    The Fed revisiting analysis quarterly and requiring banks to submit their revised stress test is “prudent” given the ongoing economic uncertainty, Cassidy said, and “should make the capital planning process more relevant to the current environment.”

    Cassidy sees Dodd-Frank Act stress testing (DFAST) results as “strong, which suggests that when the economic environment stabilizes and starts to expand in the second half of 2020, the banks will be well positioned to resume stronger capital action plans in 2021.”

    Atlantic, John Heagerty

    “Although the cancellation of buybacks and the capping of dividends were expected, the backward-looking earnings test for future dividends was a surprise,” Heagerty wrote. He sees an impact only for Wells Fargo, and had already halved his dividend forecast, and noted that Citi and Morgan Stanley “performed much better in 2020, which will be beneficial for post-pandemic returns.”

    He added that “coronavirus stress scenarios look very negative at first blush but bizarrely don’t take into account any government stimulus or Fed support so are somewhat unhelpful.”

    –With assistance from Yalman Onaran.

    #24043
    Truman
    Participant

    Deutsche Bank $DB Downgraded by Societe Generale from Hold » Sell #DAX #XLF Following Stress Tests

    #24250
    Truman
    Participant

    [size=5][b]Fed extends emergency lending programs through year-end that were expected to expire Sept 30
    Fed commercial paper facility extended to March 17, 2021[/b][/size]

    The Federal Reserve Board on Tuesday announced an extension through December 31 of its lending facilities that were scheduled to expire on or around September 30. The three-month extension will facilitate planning by potential facility participants and provide certainty that the facilities will continue to be available to help the economy recover from the COVID-19 pandemic.

    The Board’s lending facilities have provided a critical backstop, stabilizing and substantially improving market functioning and enhancing the flow of credit to households, businesses, and state and local governments. Each facility was created under section 13(3) of the Federal Reserve Act with the approval of the Treasury Secretary.

    The extensions apply to the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Paycheck Protection Program Liquidity Facility, and the Main Street Lending Program. The Municipal Liquidity Facility is already set to expire on December 31, with the Commercial Paper Funding Facility set to expire on March 17, 2021. Further details on each can be foundhere.

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