While the stress tests broadly delivered good news for the nation's big banks, some companies fared better than others, with varying implications for capital payout announcements that are expected to begin this week.
The Federal Reserve gave all 23 participating banks a green light to resume dividend payments and share buybacks after their aggregate common Tier 1 capital ratios under the most severe downturn scenario stayed well above the minimum required. At stake for each bank was how much their capital requirements could be lowered based on individual performances.
The Fed is allowing banks to adjust their original capital distribution plans before publicly disclosing them along with their new stress capital buffer requirements — an extra layer of cushion required by regulators last year — as early as after the market closes Monday.
Management teams at the participating banks are likely debating how aggressive to be with their plans, analysts said. Some firms may be relatively restrained given the U.S. economy’s uncertain footing and the high prices that banks would have to pay at the moment to repurchase their shares.
The days of “big bang” payouts following stress test results may give way to gradual increases in a series of announcements in the months ahead, said David Fanger, senior vice president at Moody's Investors Service.
“You don’t want to shoot all your marbles right away,” Fanger said.
One of the biggest winners Thursday was Capital One, which will likely see its stress capital buffer shrink from 5.6% last year to the minimum 2.5%, according to an estimate by Keefe, Bruyette & Woods.
This was likely in part because this year’s scenario was less punitive on consumer loans, which make up the bulk of Capital One’s business. The $425 billion-asset company likely benefited from having lower credit card balances, as consumers used stimulus checks to pay down those accounts.
Capital One’s common equity Tier 1 capital ratio — the main cushion meant to absorb losses during a downturn — declined by 2.2 percentage points to the trough projected during the stress tests’ most adverse scenario. This was an improvement from the 5.4-percentage-point decline during the test completed in June 2020.
The McLean, Virginia-based bank had an actual common equity Tier 1 ratio of 14.6% at the end of the first quarter, and company executives have affirmed a target of 11%. The board of directors has authorized a share repurchase plan of up to $7.5 billion of common stock, although executives have said the company’s repurchase capacity in the second quarter is likely to top out at $1.7 billion.
“How quickly we complete that $7.5 billion that the board has already authorized is going to tie back to any unforeseen additional regulatory restrictions, but also trading volumes in our stock and then … looking holistically at our capital position,” Chief Financial Officer Andrew Young said on an April conference call.
Another winner last week was
Regions Chief Financial Officer David Turner said during an April earnings call that the bank intended to start repurchases in the second quarter pending the Fed’s restrictions.
Other large banks that fared better than last year included Goldman Sachs and Morgan Stanley. Each is likely to see their stress capital buffers lowered, according to analysts’ estimates, but their cushions will remain higher than those of several of their peers.
Trust and custody banks also fared well, with KBW estimating a stress capital buffer of 2.5% for Northern Trust, State Street and Bank of New York Mellon. Each has said they are eyeing plans for higher dividends and share repurchases.
On the other end of the spectrum were Citigroup and Wells Fargo. While both megabanks held their capital ratios above the minimum required, they did not perform as well as they did last year.
Citi’s common equity Tier 1 ratio declined by 2.7 percentage points under the most adverse scenario, which is more than the 1.5- percentage-point decline in the June 2020 results. Wells Fargo’s 2.8-percentage-point decline also eclipsed its 2-percentage-point drop a year earlier.
Both companies still have high enough capital levels to dole out returns to shareholders, analysts say.
Citi CEO Jane Fraser said at an industry conference earlier in the month that the New York-based company was trying to find the right mix between payouts to shareholders and investments into the bank.
Wells Fargo CEO Charlie Scharf said during the same conference that his bank was prioritizing returning its dividend rate, which is now unusually low, to a normal level before considering stock buybacks.
Overall, the 23 participating banks have an estimated $230 billion in excess common equity Tier 1 capital above what they’re required to hold, some of which could be delivered to investors, Barclays analysts said in a note to clients.
Moody’s said in a report Friday that allowing banks to restart payments to shareholders is a “credit negative” for the firms, as their bond holders, unlike their shareholders, would prefer they preserve their capital. Fanger said he expects banks will move cautiously in order to avoid decreasing their dividend payments or share repurchases if the stress tests next year prove difficult.
“They don’t want to be caught short next year,” Fanger said. “It is quite possible that you will see a gradualist approach to this.”
