US Big Bank easily passes stress test, shareholders' dividend feast is imminent!

According to the financial news app Zhitong Finance, several major banks in the United States have successfully passed the Federal Reserve's annual stress test. This not only paves the way for them to increase shareholder dividends but also demonstrates the resilience of the banking industry in the face of potential economic downturn. Although the industry is currently awaiting a weakened version of a more stringent capital rule proposal, the results of the stress test undoubtedly provide strong evidence of the banks' stability.

In a statement released on Wednesday, the Federal Reserve pointed out that during an economic recession, the capital levels of each bank participating in the test exceeded the minimum requirements. Despite the banks expecting to incur losses of nearly $685 billion, leading to a greater decline in capital than last year, this result still falls within the expected range of the stress test.

Since the financial crisis of 2008, the annual stress test has become a routine assessment for the banking industry, involving 31 banks with assets of at least $100 billion. In terms of the Common Equity Tier 1 (CET1) ratio, the average level of these banks is expected to increase significantly from the minimum requirement of 4.5% to 9.9%, demonstrating a far higher capital adequacy ratio than the standard.

Michael Barr, Vice Chairman for Supervision at the Federal Reserve, emphasized that the purpose of the stress test is to ensure that banks can absorb losses and maintain operations under extreme conditions. This year's test scenario includes a peak U.S. unemployment rate of 10%, a 55% stock price plunge, and a 40% drop in commercial real estate prices. In addition, some large banks also face additional global market shocks, including stock price declines, significant increases in short-term Treasury rates, and depreciation of the U.S. dollar.

Although all banks participating in the test passed the assessment, their performances vary. For example, JP Morgan's CET1 ratio is expected to decrease from 15% to 12.5%, while Wells Fargo is expected to decrease from 11.4% to 8.1%, although these ratios still remain well above the minimum standards.

The test results also revealed the stress capital buffer levels that banks must maintain, providing additional protection against potential losses. Banks with CET1 ratios below the industry average, such as Wells Fargo and Goldman Sachs, experienced stock price declines in after-hours trading. The Federal Reserve expects an overall slight increase in stress capital buffers.

Barr mentioned in the statement that the additional capital accumulated by banks above the minimum requirements in recent years demonstrates its utility. This extra capital buffer enables large banks to continue providing credit to households and businesses during periods of financial stress.

Since the last stress test, capital requirements have been a focal point of intense discussions between regulatory agencies and the banking industry. In July last year, the Federal Reserve and other regulatory agencies proposed a stricter capital rule plan that is expected to increase capital requirements for banks with assets exceeding $100 billion by 16%. However, the banking industry has opposed this, believing that the new rules will have adverse effects on consumers and businesses, prompting modifications to the plan.

Nevertheless, Barr reiterated the importance of banks holding more capital in his statement on Wednesday. He pointed out that the increase in losses this year is mainly due to the rise in credit card balances and delinquency rates, the increase in corporate credit portfolio risks, and the rise in costs and decrease in income in recent years. These factors indicate the need for larger capital buffers for banks According to reports, the Federal Reserve has submitted a document to the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency proposing potential modifications to last year's proposal, with an expected decrease in capital increases to 5%. However, officials have not yet reached a consensus on this, and it remains unclear whether the modification plan can be completed before the November U.S. presidential election.

It is worth mentioning that the Federal Reserve expects banks to announce dividends and buyback plans after 4:30 pm on Friday.

Despite the uncertainty surrounding capital rules, the largest banks in the United States are optimistic about their capital levels this year and have increased their stock buyback efforts ahead of the stress test results. In the first quarter of this year, the six largest banks in the United States repurchased over $14 billion in stocks, a 73% increase from the slow buybacks in the second half of last year. In the second half of last year, banks slowed down their stock buyback pace in response to new capital rule proposals. However, in recent months, all signs indicate that these proposals have been watered down.

The buyback pace of the six largest banks in the United States in the first quarter is expected to drive them to repurchase $58 billion in stocks this year, a significant increase from the past two years. However, this number is still far below the peak buyback scale of over $80 billion in 2021 and over $100 billion in 2019.

In recent months, top officials of the largest banks in the United States have taken turns to "show off" their excess capital. Wells Fargo CEO Charlie Scharf stated last month that the bank "hopes to increase dividends." Goldman Sachs President John Waldron stated that the industry plans to do so. Bank of America CEO Brian Moynihan stated that if the final stage of Basel III is watered down, "our excess capital will increase significantly." JPMorgan Chase CEO Jamie Dimon stated last month that the bank repurchases about $2 billion in stocks each quarter and "can do more."