US banks hitting the ceiling on cash buyback

Bloomberg

US banks are hitting the ceiling on how much cash they can hand back to shareholders.
After two years of surging payouts as regulators relaxed the reins on the biggest lenders, those firms are likely to boost dividends and buybacks by just 3% following this year’s stress test, according to analysts’ estimates compiled by Bloomberg. The Federal Reserve will release results of the first part of its annual review next week.
Payouts to shareholders started to ramp up in 2016 after the Fed was satisfied that the largest lenders had adequately beefed up loss buffers and improved risk management. Firms including Goldman Sachs Group Inc. and Morgan Stanley had their payouts limited in last year’s test because of a one-time hit to capital from a corporate-tax overhaul, and analysts expect those shackles to be removed this year.
“Payout ratios should be increasing for a few banks that had conditional approvals last year, but we’re expecting only modest changes in payout ratios for the remaining banks,” Brian Kleinhanzl, an analyst with Keefe, Bruyette & Woods, said in a note.
The 12 largest lenders are expected to boost payouts by $5 billion, 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% of their annual profit.
The Fed will release this year’s results in two stages. The first step, coming on June 21, will show the hypothetical losses firms would face under Fed’s calculations. Then, on June 27, the Fed will incorporate the banks’ planned cash distributions to see if they can meet required minimum capital levels in a stressed environment.
The number of firms required to take part in the exercise has been halved after Congress tweaked the post-crisis banking law to ease the burden on mid-size banks.
Goldman Sachs, Morgan Stanley and State Street Corp. were given passing grades in last year’s test even though their capital levels fell below the required minimums in the exam. The Fed was lenient because part of the decline was a result of one-time charges related to the 2017 tax overhaul, but it limited their payouts.
While Goldman Sachs and Morgan Stanley will probably keep their payouts below 100% of profits after this year’s exam, State Street’s could jump by 40 percentage points to 108%, according to KBW.
Goldman Sachs and Morgan Stanley — as well as other firms with large trading arms, like JPMorgan Chase & Co. — could also benefit from the differences in this year’s test. While the 2019 scenario incorporates the harshest hypothetical recession and the worst increase in unemployment used in the tests so far, its stock and bond market losses are less severe than last year.