The Fed’s clean bill of health will allow the biggest U.S. banks to boost dividends and share buybacks over the coming year.
Wells Fargo (WFC) – Get Wells Fargo & Company Report, JPMorgan (JPM) – Get JP Morgan Chase & Co. Report and Bank of America (BAC) – Get Bank of America Corporation Report traded higher Friday after the Federal Reserve said that all of the nation’s largest banks could weather a severe shock to the U.S. economy in an assessment that will allow them to boost shareholder returns over the coming year.
All 33 U.S.-based banks — with more than $100 billion in assets — passed the Fed’s annual ‘stress test’, the central bank said late Thursday, a report card put in place in the wake of the global financial crisis that probes a bank’s ability to keep enough capital on hand to absorb losses — and protect depositors — in the event of a severe recession.
The Fed put together a scenario that included a surge in the headline unemployment rate, to 10%, paired with a severe economic downturn, a 40% collapse in commercial real estate and a 55% decline in domestic stock prices.
Under those conditions, the Fed said, banks would take around $612 billion in total losses, but still maintain healthy capital buffers.
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“The tests evaluate the resilience of large banks by estimating their capital levels, losses, revenue and expenses under hypothetical scenarios over nine future quarters,” the Fed said. “This year’s hypothetical scenario is tougher than the 2021 test, by design, and includes a severe global recession with substantial stress in commercial real estate and corporate debt markets.”
Wells Fargo shares were marked 1.2% higher in pre-market trading Friday to indicate an opening bell price of $38.35 each. JPMorgan was marked 0.4% higher at $113.92 while Bank of America gained 0.4% to $32.21 each.
The clean bill of health will allow banks to boost dividends and share buybacks, given the breadth of their so-called ‘capital buffers’, and announcements are expected to begin on Monday.
That said, slowing economic growth, a pullback in consumer spending, muted merger activity and a big jump in short-term interest rates has clipped bank profits in 2022, leaving banks will less to hand over to shareholders than in recent years.
First quarter profits from the four biggest U.S. banks were down 33% from last year as the country’s biggest lenders set aside billions to absorb potential bad loan losses as well as exposures linked to Russia.
JPMorgan (JPM) – Get JP Morgan Chase & Co. Report CEO Jamie Dimon cautioned in April on the impact of the Russia-Ukraine conflict on the bank’s profits, while also warning that rate hikes from the Federal Reserve “could be significantly higher than the market expects” between now and the end of the year.
Still, JPMorgan said only last month that its full-year net interest income, a key gauge of bank profitability, would rise to $56 billion this year, a noted improvement from a target of “in excess of $53 billion” it published alongside its first quarter earnings last month.
The U.S.’s biggest commercial and investment bank also said it should meet a return on tangible capital equity target of 17% as it hold annual expenses at around $77 billion, although CFO Jeremy Barnum said inflation could lift that tally to as high as $79.5 billion.