Wall Street "Stress Test" results to be announced soon, stress testing crucial for bank stock buybacks

Intelligent Financial News APP noticed that the Federal Reserve will announce its annual stress test results after the market closes on Wednesday, which will determine the amount of capital large banks need to set aside to withstand financial shocks.

The test will calculate the level of stress capital buffer (SCB) for each bank. This in turn will indicate how much capital they will be allowed to return to shareholders in the form of dividends and stock buybacks.

Morgan Stanley analyst Betsy Graseck stated in a recent report to clients that for the largest banks (Category 1 to Category 3), the 2024 test should produce a SCB similar to the 2023 test.

This result is expected to encourage globally systemically important banks with significant excess capital to increase their buyback efforts. "In GSIBs (Globally Systemically Important Banks), we expect a median of 14.8%."

Graseck said, "Following the reintroduction of the Basel Accord in its final stage, buybacks in 2025 are expected to increase by 182% year-on-year."

She pointed out that one uncertainty for Category 1 and Category 2 banks is whether the Fed will change the calculation method for accumulated other comprehensive income (AOCI). She said, "If the Fed's AOCI method is different from last year, it could push up the SCB for banks with large AFS securities portfolios." Citigroup should be least affected, as AOCI only impacts the bank by 30 basis points, while the median impact for all Category 1 and Category 2 banks is 40 basis points.

Due to the Federal Reserve's tiered approach to bank regulation - the larger the bank, the stricter the regulation - not all banks will undergo testing every year. Banks with assets between $100 billion and $250 billion (Category 4) were last tested in 2022.

Graseck stated that this year's stress test is stricter than the 2022 test, posing an upward risk for banks in this category.

HSBC analyst Saul Martinez believes that JPMorgan Chase (JPM.US) and Bank of America (BAC.US) are in a favorable position, even under the revised Basel III endgame rules. As for Wells Fargo (WFC.US), he expects that a SCB comparable to previous years, even considering potential Basel endgame requirements, means "quite a bit of excess capital."

He mentioned that Citigroup's SCB level is similar to last year, and compared to other currency center banks, its capital flexibility will decrease.

J.P. Morgan analyst Ken Usdin pointed out, "AOCI being included in CET1 is the heaviest burden for regional banks, and this requirement is expected to remain in the final rules of Basel III."

Usdin wrote in a report in early June, "With CET1 ratios rising, expectations for softer B3 results, increased likelihood of a soft landing, and reduced loan demand, buyback expectations are generally on the rise." GSIBs have higher expected return on equity, "they all repurchased stocks in the first quarter and are expected to continue repurchasing throughout the year."

Usdin stated that among the banks studied by Jefferies, the company predicts an average dividend payout ratio of around 68% (or about 7% of market capitalization) for the year 2025, with a positive outlook on M&T Bank (MTB.US), Bank of New York Mellon (BK.US), State Street Corporation (STT.US), and PNC Financial Services Group