Back to top

Image: Bigstock

GS, BAC, WFC & Others Hike Dividends After 2022 Stress Test

Read MoreHide Full Article

After the major banks cleared the annual stress test, investors were waiting for them to reveal capital plans for the next four quarters. Now, the wait is over. Yesterday, after the market closed, banks came out with their new/updated capital deployment plans in the form of dividend raises and share repurchases worth billions of dollars.

Last week, the Federal Reserve gave a green signal to banks’ plans following the 2022 Stress Test. The central bank noted that all the 34 biggest lenders cleared the test and would collectively incur $612 billion in losses under this year’s hypothetical severe downturn scenario. Banks’ common equity tier 1 ratio would decline to 9.7%, which is still substantially above the minimum requirement of 4.5%.

This underscores the fact that larger banks are capable of withstanding micro/macro-economic shocks, remain handily above the regulatory capital requirements and return more capital to shareholders. The notable ones announcing intentions to raise quarterly dividends are Goldman Sachs (GS - Free Report) , Bank of America (BAC - Free Report) , Wells Fargo (WFC - Free Report) and Morgan Stanley (MS - Free Report) .

Yet one must note that this year’s dividend increases are subdued compared with 2021 plans when banks, after a year’s hiccup, had announced bumper rewards. Specifically, Morgan Stanley had doubled its quarterly payouts, while GS wasn’t far behind with a 60% rise. If investors expected similar plans for 2022, they were in for a disappointment.

One must understand that the operating environment has drastically deteriorated for banks as the ongoing Russia-Ukraine conflict and several macroeconomic factors weigh on financials. Nevertheless, this time, Goldman steals the deal with a 25% increase to $2.50 per share, while MS has announced its intention to hike dividend by almost 11%. WFC and BAC aren’t far behind either, with announcements of 20% and 5% dividend hikes, respectively.

Surprisingly No Moves by JPM, C

The biggest U.S. bank – JPMorgan (JPM - Free Report) – kept the dividend unchanged at $1 per share “in light of higher future capital requirements.” Jamie Dimon, chairman and CEO of JPM said, “We will continue to use our capital to invest in and grow our market-leading businesses, pay a sustainable dividend, and we will retain capital to fully satisfy our future regulatory requirements.”

Another major bank, Citigroup, said it will keep dividend payout stable at 51 cents per share “in a range of stress scenarios.” Jane Fraser, Citi CEO, stated, “The combination of our earnings generation, divestitures, optimization efforts and management buffer - which was designed in part to temporarily address volatility - will be important tools as we manage toward our CET1 target over the coming quarters.”

Parting Thoughts

This year is turning out to be a bad one for equity markets, and banks are not untouched by the same. The S&P 500 is down 18.7% so far this year (as of Jun 27) and the KBW Nasdaq Bank Index has lost more than 23%.

Recessionary fears as the Fed keeps raising interest rates to tame red-hot inflation have made the investors wary. At this point, investing in stocks that provide solid dividends can help generate decent returns.

Thus, investors must keep an eye on banks that have cleared the stress test and announced dividend hikes. Also, higher interest rates and a modest rise in loan demand will aid banks’ net interest income in the near term. Banks are also undertaking business restructuring efforts, which are likely to provide support to fee income sources.

All the banks mentioned in this article currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.