Fed approves bank share buybacks; big payments merger falls apart

Receiving Wide Coverage ...

Begin the buybacks

The Federal Reserve said it will allow banks to restart share buybacks after the latest stress tests revealed that “the largest U.S. banks remain strong enough to survive the coronavirus crisis but warned that a prolonged economic downturn could saddle them with hundreds of billions of dollars in losses on soured loans,” the Wall Street Journal reported. However, it said it “would continue to restrict dividend payouts.”

“The Fed said the banks could restart making repurchases in the first quarter, but still can’t return to shareholders more than they have been making in profit over the past year. The aggregate dividends and repurchases can’t exceed the average quarterly profit from the four most recent quarters.”

The Fed made the decision “even though it found that the country’s biggest lenders could face pandemic-related loan losses of more than $600 billion,” the Financial Times said. “But the Fed said it was giving banks more freedom on payouts because they had already significantly increased their capital buffers and all 33 in the exercise would be above minimum capital levels even under the most severe stress they were tested against.”

“We will continue to maintain a fortress balance sheet that allows us to safely deploy capital by investing in and growing our businesses, supporting consumers and businesses, paying a sustainable dividend, and returning any remaining excess capital to shareholders,” JPMorgan Chase CEO Jamie Dimon said.

The Fed’s decision to “curb buybacks, which make up a greater share of overall capital distributions for the largest banks, means cash distributions for shareholders in companies like JPMorgan, Citigroup and Bank of America could come roaring back,” the New York Times said. “Even Wells Fargo, which reported a loss during the second quarter this year, could start to hand out more cash, because the average of its four most recent quarters still indicates profitability.”

While the banks will be allowed to “pay out more to shareholders,” the move likely won’t be “enough to sop up big excess capital buffers that drag on returns,” the Journal said.

The Fed “voted unanimously not to adjust any firm’s stress capital buffer, in an effort to prevent banks from having to raise additional capital in the midst of stressed economic conditions,” American Banker reported.

Happy trails

JPMorgan Chase said former Exxon Mobil CEO Lee Raymond, its longtime lead independent director who has spent more than 30 years on the bank’s board, is leaving at the end of the year, the Journal reported.

“Environmental groups and several large institutional investors earlier this year called for the ouster of Mr. Raymond from the JPMorgan board, saying his energy background conflicts with his duties when it comes to climate-change risk. They also raised concerns that JPMorgan has for years waived the board’s retirement age of 72 for the 82-year-old Mr. Raymond, the bank’s longest-serving director and a trusted adviser to CEO Jamie Dimon.”

“A JPMorgan representative said that Mr. Raymond’s retirement had ‘zero’ to do with climate issues or investor activism,” the FT said. “In a memo to staff, Dimon praised him as ‘a man of extraordinary character, wisdom and judgment’ and ‘an instrumental force in helping make JPMorgan Chase the outstanding company it is today.’”

“Climate activists have been pushing JPMorgan for years to stop funding fossil fuel projects and do more to help reduce greenhouse gas emissions, and Mr. Raymond, who spent his years as an Exxon executive steadfastly rejecting scientists’ findings that carbon emissions were causing global temperatures to rise, stood out as a target of their ire,” the New York Times said.

Wall Street Journal

No loans for you

“The Paycheck Protection Program funneled $525 billion in forgivable loans to millions of small businesses in the pandemic’s early days. Yet that massive infusion masked a years-long contraction in small-business lending that happened alongside a big-business borrowing boom.” In fact, being ignored by banks is “an all-too-familiar obstacle” for small firms.

“There are a few reasons for the credit chasm. Thousands of community banks disappeared over the past decade, removing the main funding source for many of their local businesses. Small loans are also far less profitable: Bankers say it costs about the same to process an application for a $100,000 loan as it does for a $1 million one. Lenders have further pulled back during the pandemic, tightening underwriting standards for small businesses this summer to a degree unseen since the last financial crisis.”

No deal

Fidelity National Information Services and Global Payments “recently held unsuccessful talks for a merger deal that could have been valued at around $70 billion, in a sign that a wave of consolidation is still sweeping through the payments industry,” the Journal said. “Had the companies managed to strike a deal, it would have been the biggest of the year by far, eclipsing several transactions valued at about $40 billion.”

“The companies, which make technology that facilitates merchant payments and banking, were in advanced talks and aiming to announce a deal this coming week before the negotiations broke down in the last few days. Though there is little prospect of the talks coming back to life imminently, they could get revived later.”

Taking the oath

Christopher Waller, the former research director of the Federal Reserve Bank of St. Louis, was sworn in Friday as a member of the Fed’s Board of Governors, “becoming the fifth member of the body nominated to his or her current position by President Trump.” His term ends in January 2030.

“Fed governor Lael Brainard is the only one of the board’s six members who was nominated to her slot by President Obama. One seat on the seven-member body remains vacant.”

Rapid testing

Thanks to a deal with CVS, Goldman Sachs “plans to test workers reporting to its New York offices for Covid-19 more frequently than it has throughout the pandemic. Goldman, whose CEO, David Solomon, has continued going into headquarters throughout the pandemic and has stressed the importance of office culture, had already converted a corner of the lobby for on-site testing. The deal with CVS—a big client of the investment bank—will expand that effort in the hopes of bringing as many as 2,000 additional traders and bankers back to its New York office in January.”

“Under a deal reached in recent days, bank employees would receive a CVS-administered rapid test that delivers results in 12 minutes while they wait to enter.”

Financial Times

Starting over

Credit Suisse, which last week was accused by Swiss prosecutors of enabling money laundering, the latest in a long string of scandals and other problems, hopes to begin the new year with “clean slate,” its new CEO said. “There will never be a totally clean slate,” Thomas Gottstein told the FT. “We will always have issues, but it’s certainly my goal to start 2021 with as clean a slate as possible.”

Washington Post

Winners

Large banks with big trading desks, “bolstered by strong capital and cheap funding, should ride the wave of monetary expansion in 2021, even if economic growth might take years to recover,” a Bloomberg analysis says. “Granted, the trajectories of the pandemic and the economy remain uncertain. Accommodative policies could be curtailed before a vaccine has properly taken effect. Nonetheless, the odds are skewed in favor of financial firms that facilitate and manage this huge gusher of liquidity.”

Quotable

“The banking system has been a source of strength during the past year and today’s stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy.” — Randal Quarles, the Fed’s vice chairman of supervision, announcing the decision to allow banks to resume share buybacks.