Results from the Federal Reserve’s latest stress tests Friday gave top banks a conditional green like to buy back shares again in Q1, though dividends still can’t go up. Bank stocks rallied late.
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Soon after the results came out, JPMorgan Chase (JPM) announced a new repurchase program of $30 billion that starts in Q1. Goldman Sachs (GS) also said it will resume buybacks next quarter but didn’t give an amount.
But repurchases can only resume if a bank’s dividends and Q1 buybacks don’t combine to exceed average earnings per quarter over the last four quarters.
“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,” said Randal Quarles, the Fed’s vice chair for supervision, in a statement.
An earlier set of stress tests in June found that most banks were financially padded enough to withstand the impacts of the coronavirus pandemic.
But the Fed also ordered banks to cap dividends and suspend share repurchases throughout Q3 and Q4 to maintain financial buffers. Meanwhile, the economic collapse even forced Wells Fargo (WFC) to slash its dividend 80% this summer.
Since the June stress tests, banks have had to resubmit and update their capital plans later this year “to reflect current stresses” while the Fed conducted additional analyses as more economic and financial data rolled in.
But Fed policymakers are more optimistic about the economy, raising their forecasts at their meeting this week.
The central bank resisted some calls for easier policy and instead maintained the status quo, as the deployment of coronavirus vaccines looks to boost the economy next year.
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Stress Test Scenarios
Shares of JPMorgan jumped 5.1% after hours on the stock market today. Among other bank stocks, Bank of America (BAC) climbed 4.8%, while Citigroup (C) surged 5.4%. Goldman Sachs added 5.1%, and rival Morgan Stanley (MS) climbed 4.5%. Wells Fargo rallied 3.1%.
The additional stress tests looked at two coronavirus-induced scenarios. One was for a sharp but relatively short economic decline with the unemployment hitting 12.5% at the end of 2021 but improving rapidly afterward.
The other was for a less severe but longer slump, with the jobless rate worsening to 11% by the end of 2021 but declining more slowly.
Under both scenarios, large banks would collectively lose more than $600 billion, the Fed said Friday. While that’s worse than the downturned that was modeled in the first stress test this year, the Fed said each bank’s risk-based capital ratio stayed above required minimums.
Banks have been adding to their loan-loss provisions the year as they gird for economic fallout from the pandemic.
Meanwhile, their trading desks have been booming as market volatility boosts stock and bond transactions. Investment banking units have also seen a big year for IPOs with several big startups like Airbnb (ABNB) going public.
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