With all participating banks comfortably clearing the Federal Reserve's latest stress test exercise, attention has turned to capital distributions. But the Street may have to wait for answers on how much banks will spend on dividends and share repurchases.
The stress-test results released June 24 showed the 23 banks in the exercise had plenty of capital to withstand the severely adverse hypothetical scenario. The Fed also lifted its restrictions on share buybacks, creating expectations that the well-capitalized banking industry would return significant slugs of money to shareholders.
However, several analysts noted that it might take some time to learn the details on how much stock banks would buy back. The Fed requested banks not disclose buyback plans until after market close on June 28, but some analysts wrote that banks might opt to not fully disclose their plans to retain flexibility.
"Given that the [stress capital buffer] framework gives banks wide latitude to adjust their plans in real-time based on evolving conditions, it is not clear that individual banks will see a benefit in disclosing a full cycle's worth of capital return plans all at once," wrote R. Scott Siefers, an analyst for Piper Sandler.
In a June 24 note on the stress tests, analysts at Baird Equity Research, led by David George, offered projections for payout ratios — a measure of capital distributions relative to net income — for large- and mid-cap banks in their coverage. The analysts expect most of the banks in their coverage would return more than 100% of their net income, including all three megabanks over $1 trillion in assets in their coverage space. The analysts project JPMorgan Chase & Co.'s dividends and share buybacks would equal 113% of its net income for the four quarters starting with this year's third quarter.
Raymond James analysts were similarly optimistic that their covered stress test banks would approach 100% payout ratios. The analysts expect 90% payout ratios or greater for Regions Financial Corp., Truist Financial Corp., U.S. Bancorp and Wells Fargo & Co. For PNC Financial Services Group Inc., which agreed to spend $11.6 billion to buy BBVA USA, the analysts project a payout ratio of 67% over the next four quarters.
"Today's results reinforce both the underlying strength of bank balance sheets and the ongoing recovery from the pandemic-induced economic downturn," wrote Michael Rose, an analyst for Raymond James.
Keefe Bruyette & Woods analysts project PNC will still hit the 100% mark, projecting a payout ratio of 105%. The analysts project an average payout of 113% for the banks in its coverage, and the analysts foresee just one bank, Truist Financial, paying out less than 100% of its net income with its estimate at 91%.
In fact, six banks even showed estimated profits over the nine-quarter scenario: The Bank of New York Mellon Corp., State Street Corp., Barclays US LLC, UBS Americas Holding LLC, U.S. Bancorp and Northern Trust Corp. While analysts expected a strong performance, some noted the banking industry's impressive ability to withstand a severe recession.
"It is pretty remarkable that the country's largest banks can absorb nearly half a trillion dollars in losses and still have almost 11% capital," Siefers wrote.
Most of the roughly $470 billion in hypothetical losses came from loans. The stress test envisioned $353 billion in total loan losses, in aggregate, for the participating banks. Baird's George noted that the test was particularly severe for commercial real estate loans with a loss rate of 10.5%, compared to a loss rate of 6.3% in last year's exercise. Commercial-and-industrial loan losses were also higher while credit card losses were slightly lower from the prior year's stress test.
A more accommodative environment for credit cards translated to a significantly stronger result for Capital One Financial Corp., which Ken Usdin of Jefferies & Co. called "the big winner" for banks in its regulatory bucket. Usdin estimated that Capital One's stress capital buffer — which is calculated using the modeled losses from the stress test — would be 2.2% this year compared to 5.4% in 2020.
Usdin also noted that Regions Financial, which was not required to participate in the stress test, made a "good choice" to opt into the exercise. The analyst wrote that the bank's implied stress capital buffer of 1.4% is notably lower than last year's 3.0% buffer.
Click here to access a template with the Federal Reserve-run 2021 Dodd-Frank Act stress-test results for the participating bank holding companies.