Fed stress test: Goldman, Morgan Stanley improve after 2018 slip

Bloomberg

Goldman Sachs Group Inc. and Morgan Stanley improved on last year’s poor results in the first round of the latest Federal Reserve stress tests, a sign they may have more flexibility to boost payouts to shareholders.
In figures posted by the Fed, the pair didn’t come as close to breaching regulatory minimums as they did last year, offering hope they will escape limits on dividends and stock buybacks imposed back then.
All 18 banks in the exam demonstrated an ability to withstand a hypothetical financial shock. The sec-ond and final round next week determines whether firms win approval to boost capital payouts.
Results posted so far show banks are getting better at coping with what’s become one of the most rigorous supervisory efforts: They maintained a collective common equity Tier 1 ratio that was double the regulatory minimum even at the depths of the theoretical recession. Lenders have been building capital for years, and while this year’s exam was harsher on credit-card loans, trading losses were down from last year at four of the five biggest Wall Street firms.
Still, when the process wraps up next week, analysts expect big banks to slow the expansion of payouts to shareholders after two years of surging dividends and buybacks.
Goldman Sachs and Morgan Stanley were allowed to dip below the required minimums in the second part of last year’s test because some of the decline was a result of one-time charges related to the 2017 federal tax overhaul.
After next week’s round, Goldman is expected to modestly reduce its total payout in dollar terms while Morgan Stanley modestly increases it, according to analyst estimates compiled by Bloomberg before the results.
This year, Goldman Sachs’s supplementary leverage ratio fell to as low as 4 percent in the first round of the Fed’s test, an improvement from 3.1 percent last year.
Morgan Stanley’s ratio was 3.9 percent, compared with 3.3 percent last year. To carry out proposals to distribute capital, banks need to remain above 3 percent by that measure in next week’s test.

TAKING ‘MULLIGAN’
Lenders are given a chance to adjust and resubmit their cash distribution plans before the second set of results is released on June 27. A record number of firms used the so-called mulligan last year to adjust their original payout requests to stay above the minimum requirements.
The 12 largest US lenders tested are expected to boost payouts by $5 billion in the next four quarters, after dividends and buybacks jumped by more than $30 billion each of the past two years. Still, the increase means they’ll likely pay out more than 100 percent of their annual profit.
In past years, some banks had initial proposals for payouts reined in after they projected their capital and leverage ratios would hold up better than what the Fed calculated. In some cases, the Fed even took issue with the strength of their capital planning.
This year, a half dozen firms including Bank of America Corp. posted internal calculations that were instead lower than the Fed’s, indicating they were even more conservative than examiners. Still, several companies were more optimistic. Morgan Stanley, for example, calculated its leverage ratio would be 1.7 percentage points higher than what the Fed found.
Altogether, the 18 banks tested would suffer a $115 billion pretax loss in the severely adverse scenario, the Fed said.
That amounts to 0.8 percent of the banks’ average assets, the same ratio as under last year’s test.
Their hypothetical revenue before provisions and trading losses was projected by the Fed to be 2.4 percent of assets, down from 3 percent last year.