Morgan Stanley, Goldman, Bank of America and Wells Fargo went up their dividends on Monday after the US banks cleared their annual stress test exercise last week.
The US Federal ReserveFederal Reserve said on Thursday that the country's largest lenders could easily weather a severe economic downturn, giving them a clean bill of health and paving the way for them to redistribute excess capital to shareholders.
The results allowed banks to raise their required capital buffer more than expected despite the Fed's test being tougher than in 2021.
JPMorgan Chase and Citigroup kept their payout flat, due to a challenging economic environment that may require more capital. A source familiar with the situation said that Citi would give a update on its capital plans at its upcoming earnings on July 15, and will probably give an update on its capital plans.
This year's dividend hikes were more subdued than in 2021, a bumper year for bank capital payouts after lenders accumulated piles of excess cash during the epidemic to cover loan losses that never materialized. In June 2021, Morgan Stanley doubled its dividend.
Under the annual stress test exercise established following the financial crisis in 2007 -- 2009, the Fed assesses how banks' balance sheets would fare against a hypothetical economic downturn. The results determine how much capital banks need to be healthy and how much money they can return to shareholders.
On Monday, Goldman Sachs said it would hike its dividend by 25%, to $2.50 per share, and Morgan Stanley said it plans to increase to 77.5 cents per share and a share buyback program of $20 billion. Bank of America raised its dividend by 5% to 22 cents per share, and Wells Fargo said it expects to increase its dividend to 30 cents from 25 cents a share.
After hours, Morgan Stanley's shares rose by 3.5%, while Goldman's shares increased by 1.4%.
JPMorgan maintained its dividend at $1.00 a share, citing higher future capital requirements. Citi is able to keep it flat at 51 cents in a range of stress scenarios, and said it would be able to keep it flat at 51 cents. The test sets the bank's stress capital buffer, an extra capital cushion on top of the regulatory minimum. The size is determined by each bank's hypothetical losses under the test.
The banks have announced their new stress capital buffers SCB on Monday, which will come into effect later this year, giving them time to rejig their balance sheets.
The stress capital buffer will increase, according to analysts' expectations, according to Citigroup, JPMorgan and Bank of America. According to analysts, the increase would be driven by higher credit provisions at Bank of America and JPMorgan, while Citi would be hit by higher trading losses, lower fee income and higher expenses.
After the stress test results were announced, each of these banks saw estimated SCBs up by 80-100 bps, relative to limited excess capital, which is greater than what we or the market anticipated, Goldman Sachs analysts wrote on Friday.
As a result, analysts were expecting that those three banks would keep their dividends flat and eliminate or reduce share buybacks to boost their capital.
On Monday, Gerard Cassidy, head of US Bank Equity Strategy at RBC Capital Markets, said that rising loan growth and accounting losses banks have taken on banks bond portfolios due to interest rate hikes, which has put pressure on banks' capital.
He said it's clear that it's going to be different this year than last year.