Morgan Stanley, JPMorgan, Bank of America, Goldman Sachs and Wells Fargo said on Monday they were raising their capital payouts after the US Federal Reserve gave them a clean bill of health following their annual “stress tests” last week.
Analysts and investors had expected the country’s largest lenders to start issuing as much as $130bn in dividends and stock buybacks from next month after the Fed last week ended emergency pandemic-era restrictions on how much capital they could give back to investors.
Morgan Stanley delivered the biggest surprise to investors, however, saying it would double its dividend to 70 cents a share in the third quarter of 2021. Some analysts had been expecting a boost to about 50 cents.
The Wall Street giant also said it would increase spending on share repurchases. Its shares rose as much as 3.7 percent in after-market trading following the announcement.
Morgan Stanley CEO James Gorman said in the announcement that the bank could return so much capital because of the excess it has accumulated over several years. The action, he said, “reflects a decision to reset our capital base consistent with the needs we have for our transformed business model”.
Bank of America Corp said it will increase its dividend by 17 percent to 21 cents a share beginning in the third quarter of 2021, and JPMorgan Chase & Co said it will go to $1 a share from 90 cents for the third quarter.
Goldman Sachs Group said it planned to increase its common stock dividend to $2 per share from $1.25.
Wells Fargo & Co, which has built up capital more rapidly than rivals due in part to a Fed-imposed cap on its balance sheet, said it plans to repurchase $18bn of stock over the four quarters beginning in September.
The repurchase target amounts to nearly 10 percent of its stock market value and is in line with expectations from analysts.
Wells Fargo, which for years has been trying to move past a series of costly mis-selling scandals, said it was doubling its quarterly dividend to 20 cents a share, consistent with analyst expectations.
“Since the COVID-19 pandemic began, we have built our financial strength … as well as continuing to remediate our legacy issues,” CEO Charlie Scharf said in a statement. “We will continue to do so as we return a significant amount of capital to our shareholders,” Scharf added.
The stress tests used to trigger anxiety across Wall Street, but the banks’ solid showing underscores how comfortable the industry has grown with the exercises. This year, with banks sitting on a massive stockpile of excess cash, the exams were primarily an indicator of how much of that money can be doled out to shareholders.
Citigroup, meanwhile, confirmed analysts’ estimates that a key part of its required capital ratios had increased under the stress test results to 3 percent from 2.5 percent.
An increase of that size will limit Citigroup’s share buybacks, versus its peers, a report from analyst Vivek Juneja of JPMorgan shows. Juneja expects Citigroup will have the lowest capital return of big banks he covers.
Citigroup CEO Jane Fraser said the bank will continue its “planned capital actions, including common dividends of at least $0.51 per share” and buying back shares in the market.
Bank of America’s shares were flat in after-hours trading, shares of Goldman Sachs were up 0.6 percent, while Citigroup’s and JPMorgan’s were down 0.9 percent and 0.3 percent, respectively.
The Fed said on Thursday it was ending its remaining curbs on dividend payouts after finding the country’s largest banks would remain well capitalised in its latest stress tests.
The central bank said the test found 23 of the largest firms would suffer a combined $474bn in losses under a hypothetical severe downturn, but would still have more than twice as much capital required under Fed rules.
A surge in payouts is welcome news for investors but could put big banks on defence again in Washington. Critics, including US Senator Elizabeth Warren of Massachusetts, have condemned buybacks and dividends for enriching executives, and have called for lenders to use excess capital to do more for employees.