JPMorgan Chase & Co, Wells Fargo & Co. and other major U.S. banks plan to boost their dividend payments after passing stress tests evaluated by the Federal Reserve.
The share buybacks signal that regulators view banks as being healthy enough to withstand the remaining uncertainties in the economy, after the banking system has been profitable for a year.
“This is one of the final steps in terms of showing the redemption of the banks from 2008,” said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Investment Counsel, which owns bank stocks.
In this second round of stress tests, the Fed had the banks submit their own analysis of whether they could withstand adverse economic conditions. In 2009, the Fed played a much larger role in analyzing banks’ capital.
The central bank said on Friday it was restricting dividend payments to 30 percent or less of the company’s expected earnings — a ratio well below the 50 percent level paid out during better times.
In the years leading up to the crisis, banks paid out billions of dollars to investors, both as dividends and share buybacks, even as the financial system began looking shaky.
The banks’ payout announcements came minutes after the central bank said it would allow some of the 19 largest U.S. banks to use some of their massive capital cushions to buy back shares, repay capital to the government and boost dividend payments.
“The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital,” the central bank said in a statement.
Improvements in economic conditions and cash positions at the largest financial institutions have convinced the Fed that some of the largest banks can start to reduce capital cushions built up in response to the financial crisis.
Banks such as BB&T, BNY Mellon and U.S. Bancorp also announced plans on Friday to boost dividend payments, in the latest sign that the banking system is recovering.
Under the Dodd-Frank regulation law, large banks and other financial firms are required to conduct stress tests at least once a year.
TOUGH STRESS TESTS
The Fed started notifying the 19 largest banks, including Citigroup, Bank of America and Goldman Sachs, whether they passed the second round of stress tests and whether they have won approval to pay out dividends.
But the Fed left it to the banks to disclose individual results.
As part of this year’s test, the central bank assessed banks’ ability to repurchase shares and pay dividends while still maintaining adequate capital cushions in adverse economic conditions. Those conditions for 2011, for example, included an unemployment rate of 11 percent, a 1.5 percent decline in gross domestic product and a 27.8 percent drop in equity prices.
BB&T Chief Executive Kelly King said he found the second round of stress tests “very similar” to the exams conducted in 2009.
“It was a very in-depth exam. I think, frankly, it was an accurate and reasonable assessment, based on the various scenarios the regulators outlined,” King told Reuters.
European regulators are running through their own set of stress tests, which cover a much larger number of banks.
Investors have been eager for banks to restore quarterly payouts after they were either suspended, or slashed to as little as a penny a share, at the height of the 2007-2009 financial crisis.
According to the Fed, common equity increased by more than $300 billion at the big banks from the end of 2008 through 2010.
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Here’s a list of the 19 financial institutions that were examined:
1. Ally Financial Inc.
2. American Express Co.
3. Bank of America Corp.
4. The Bank of New York Mellon Corp.
5. BB&T Corp.
6. Capital One Financial Corp.
7. Citigroup Inc.
8. Fifth Third Bancorp.
9. Goldman Sachs Group Inc.
10. JPMorgan Chase & Co.
11. Keycorp
12. MetLife Inc.
13. Morgan Stanley
14. PNC Financial Services Group Inc.
15. Regions Financial Corp.
16. State Street Corp.
17. SunTrust Banks Inc.
18. U.S. Bancorp.
19. Wells Fargo & Co.
