U.S. Banks May Boost Dividends and Buybacks after Passing Stress Tests

U.S. banks may be set to increase their dividends and stock buybacks after passing the Federal Reserve’s annual test of their ability to withstand market turmoil.  The Fed’s stress tests showed that the banks had enough capital to handle a surge in unemployment, collapsing real-estate prices, and a plunge in stocks. 

The Fed said that more than 30 banks it examined were able to remain above their minimum capital requirements during the hypothetical economic meltdown, which would have caused them total projected losses of $612 billion.  A statement from the Fed said that “banks continue to have strong capital levels, allowing them to continue lending to households and businesses during a severe recession.” 

Banks use the tests to assess how much capital they can afford to give out to investors without falling below the amount required to hold as a cushion.  If a lender breaches its capital buffer at any point in the year following the stress test, the Fed can apply sanctions, including restrictions on capital distributions and bonus payments.

The Fed’s passing marks to U.S. banks effectively gives the lenders the green light to return billions of dollars to investors in dividends and stock buybacks.  Estimates by Barclays Plc indicate that JPMorgan Chase (JPM) is set to return $18.9 billion in combined dividends and share buybacks.  Also, Bank of America (BAC) is set to return $15.5 billion, and Wells Fargo (WFC) is set to return $15.3 billion.

In 2021, dividend payouts by the six biggest U.S. banks rose by almost half after they had amassed mountains of excess capital during the pandemic.  Morgan Stanley (MS) alone doubled its quarterly dividend payout while also announcing as much as $12 billion in stock buybacks. Barclays Plc estimates U.S. banking giants are poised to return $80 billion to shareholders after passing this year’s Fed stress tests. 

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