Fed unleashes higher payouts for banks

Bloomberg

Titans of the US banking industry said they will pump out more cash to shareholders after all 18 lenders passed the Federal Reserve’s annual stress tests. The results were a particular win for Deutsche Bank AG after it repeatedly failed past exams.
A dozen of the nation’s largest lenders said they will boost payouts through dividends and stock buybacks 18 percent to more than $173 billion, a record for the group. Shares of Deutsche Bank gained in Frankfurt, while US lenders including JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. rose more than 2.5 percent in New York.
The windfall for shareholders was even richer than the $150 billion foreseen by analysts thanks to the leeway the Fed granted firms to disburse their record profits. A decade after the annual tests were introduced, the exercise no longer appears to invoke as much anxiety for the industry after executives built up capital and gained experience navigating the exam.
“It’s really a good year for the big banks,” said Adam Gilbert, head of the financial-services advisory practice at PricewaterhouseCoopers. “It’s a vote of confidence from the Fed, including for some of the foreign banks which didn’t have it before. We’re seeing increases in payouts from most of them, reflecting the strong capital positions they’re in.”
Overall, the Fed said the review showed big banks are resilient and managing capital carefully. Officials said the approved payouts will slightly exceed the banks’ projected profits for the next four quarters.
Still, the increase this year is smaller than in the past two years, when total dividends and buybacks rose about 30 percent each time.
In passing, Deutsche Bank’s US arm defied analysts’ predictions and scored a much-needed victory for Chief Executive Officer Christian Sewing, who took over the company a year ago and is struggling to turn it around.
The Fed’s endorsement of the bank’s internal oversight — after subsidiaries failed three times in recent years — shows he’s making progress in addressing a history of lax controls and misconduct, which have fueled billions of dollars in legal costs and taken a toll on the balance sheet. Last year, the Fed faulted the unit for “widespread and critical deficiencies” in capital-planning abilities.
Deutsche Bank rose as much as 4.1 percent in Frankfurt trading and was up 2.7 percent to 6.79 euros. That cuts this year’s decline to 2.6 percent. In New York, Bank of America gained 2.9 percent, JPMorgan advanced 2.7 percent and Goldman Sachs was up 2.7 percent.

‘HUGE STEP’
This week’s win for Deutsche Bank comes at a crucial moment, as Sewing mulls another turnaround plan, potentially including deep cuts to US operations. He has repeatedly said the bank remains committed to having a presence in America so that it can serve as an alternative to US. investment banks for European businesses.
Yet some investors and regulators have criticized the firm’s exposure there.
“Achieving success here was one of the key goals we set a year ago,” Sewing said in a memo to employees. “And it is a huge step forward for our business in the US and globally. A strong operating platform in the Americas is essential to our clients.”
The bank devoted significant resources to its capital-planning process and stepped up how it’s been handling some supervisory issues the Fed raised with the firm, a senior Fed official said in a briefing with reporters. The test is only part of the regulator’s oversight of Deutsche Bank’s US operations, looking at capital and capital planning, and the Fed won’t be complacent about the German lender, the official said.
Two firms — JPMorgan and Capital One Financial Corp. — passed after tempering their initial proposals to pay out capital.
And Credit Suisse Group AG’s US arm passed on the condition it improves its ability to estimate trading losses in a downturn.
The company must address the weaknesses by October 27.

Traders likely to reassess rates after US-China truce
Bloomberg

Traders will likely reassess the Federal Reserve’s path of interest-rate cuts as a truce in the US-China trade war ease concerns over the outlook for global growth.
“The tariff threat will linger for some time, weighing further on US business investment plans,” said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney.
“This will concern the Federal Reserve at the July meeting, but confirmation of the talks resuming should help further reduce market pricing for” a 50-basis-point cut, he said.
Futures traders expect the US central bank to lower rates by about a percentage point in the coming year.
They have priced in a 100% probability of a cut in July, with some even predicting as much as 50-basis-point reduction, prompting Fed Bank of St. Louis President James Bullard to caution that such a move would be “overdone.”
While investors cheered President Donald Trump’s decision to put on hold
new tariffs on Chinese goods and allow American suppliers to sell some products to China’s Huawei Technologies Co., it’s unclear whether Beijing and Washington can overcome their differences.
The Fed held interest rates steady in June, but signaled a willingness to ease should weak growth and
inflation persist.
The trade truce “should lead to some paring back of aggressive rate cut expectations, at least temporarily,” said Nader Naeimi, Sydney-based head of dynamic
markets at AMP Capital
Investors Ltd.