After the Federal Reserve stress tests, Wall Street big banks increase dividends and share buybacks

Major U.S. banks announced an increase in returns to investors on Friday after passing the Federal Reserve's annual stress tests this week.

On Wednesday, 31 major U.S. banks, including JP Morgan, Bank of America, Citigroup, Wells Fargo, and Morgan Stanley, all successfully passed the Federal Reserve's annual stress tests. The test results showed that under a series of extreme adverse economic scenarios, such as U.S. unemployment soaring to 10%, stock market values plummeting by 55%, and commercial real estate prices dropping significantly by 40%, all banks participating in the tests did not fall below the minimum capital requirements, demonstrating strong capital strength and risk resilience.

On Friday, June 28th, U.S. major banks, after passing the Federal Reserve's annual stress tests on Wednesday, showed confidence in their capital adequacy levels and subsequently announced an increase in dividends and stock buyback plans on Friday to enhance investor returns. This move not only reflects the banking industry's confidence in capital strength but also signals a commitment to healthy dividends in anticipation of the potential relaxation of Basel III final rules.

Wall Street Banks Increase Dividends, U.S. Bank Stocks Rise

Leading financial institutions such as JP Morgan and Bank of America led the way in announcing dividend increases after regulatory reviews confirmed their capital adequacy in the face of assumed economic downturns. Citigroup, Wells Fargo, and Morgan Stanley, along with over six major banks, also joined in raising dividends. In addition, JP Morgan and Morgan Stanley also approved additional multi-billion-dollar stock buyback plans.

Here are the details of the quarterly dividend increases for each bank:

• Bank of America: Dividend raised to $0.26 per share, up from $0.24 previously;
• Citigroup: Dividend increased to $0.56 per share, from $0.53 before;
• JP Morgan: Dividend raised to $1.25 per share, up from $1.15 in the previous quarter;
• Morgan Stanley: Dividend increased to $0.925 per share, previously $0.85, and authorized to repurchase up to $20 billion in stocks;
• Wells Fargo: Dividend increased to $0.40 per share, up 14% from $0.35 before;
• JP Morgan's board authorized a new stock buyback plan of up to $30 billion, raising the stock dividend to $1.25 (from $1.15);
• Goldman Sachs: Plans to increase quarterly dividends from $2.75 to $3.00;
• BNY Mellon plans to raise quarterly dividends by 12% to $0.47;
• Citizens Financial plans to add $656 million in stock buybacks.

The Federal Reserve stated on Wednesday that it hoped banks would wait until after 4:30 pm Eastern Time on Friday, after the U.S. stock market closed, to announce any dividend and stock buyback plans, to give banks and investors ample time to analyze and digest the information. On Friday overnight, U.S. bank stocks rose across the board. JP Morgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley closed up by 1.55%, 1.32%, 3.1%, 3.43%, 1.43%, and 1.49% respectively

This year's annual stress test, as an important measure to strengthen financial regulation after the 2008 financial crisis, covers banks with assets exceeding $100 billion. The test results show that under the assumed extreme adverse economic scenario, the Tier 1 common equity capital ratio (as the highest quality regulatory capital) of all banks participating in the test will remain at 9.9%, significantly higher than the regulatory agency's minimum standard of 4.5%.

This result not only demonstrates the resilience of the U.S. banking industry when facing potential economic pressures but also provides banks with further opportunities to enhance shareholder value. With the banking sector demonstrating stronger capital strength and risk management capabilities, investors can expect more robust and sustainable returns.

While the banking industry may have easily passed the stress test, these tests themselves remain a focus of debate in academia and policy circles. Francisco Covas, Chief Research Officer at the Bank Policy Institute, suggested that the models used by the Federal Reserve in conducting stress tests exhibit excessive volatility, which could increase uncertainty in the test results. Therefore, he advocates for a more rigorous public scrutiny of the design and implementation process of stress tests to ensure their transparency and effectiveness.