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BofA (BAC) Delays Dividend Amid Stress Test Result Discrepancy
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Bank of America Corporation (BAC - Free Report) delays announcing its dividend despite passing the Federal Reserve’s annual stress test. This is because there is a significant difference between how the Fed and the company’s risk management predicts BofA to fare in case of a severe recession.
Per BofA’s analysis, it will lose $52 billion in case of a severe economic downturn and its capital ratio will decline to a minimum of 8.3% per cent. However, per the Fed’s stress test results, BofA will lose only $23 billion in a severe economic downturn and its capital ratio will fall to 10.6%.
Hence, BofA has initiated a dialogue with the Fed to understand the difference that arose in other comprehensive income over the nine-quarter stress period between the Fed’s Comprehensive Capital Analysis and Review results and BAC’s Dodd-Frank Act stress test results.
Over the past six months, shares of BAC have lost 14.3% compared with the industry’s decline of 7.4%.
The results of the 2023 stress test, which were announced last week, indicate that banks have sufficient capital to withstand a severe economic downturn.
This year’s annual health check has solidified the notion that large banks are resilient. Results have shown that the 23 participating banks have enough capital to absorb the $541 billion in projected losses on loans and other positions.
Going into the stress test, analysts were forecasting conservative payouts from banks on the back of potential stringent regulatory capital requirements and ambiguity over the macroeconomic backdrop, including probable recession next year.
However, now, after the results have come out pretty well, banks are expected to be subjected to smaller stress capital buffer (“SCB”) requirements, which have opened the doors for bigger-than-expected payouts.
Thus, some of the large U.S. banks, including JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) , said on Friday that they would return more cash to shareholders.
JPM, the largest U.S. bank, intends to raise the quarterly dividend by 5% to $1.05 per share. This follows no change in dividend payout last year.
The company’s chairman and CEO, Jamie Dimon, said, “We continue to maintain a fortress balance sheet with strong capital levels and robust liquidity, and we remain prepared for a broad range of potential outcomes, including potentially higher future capital requirements from the finalization of the Basel III capital rules.”
JPM also plans to continue with its previously announced share repurchase program.
Likewise, Wells Fargo announced plans to hike its dividend to 35 cents per share from the current 30 cents. Also, over the four-quarter period through the second quarter of 2024, WFC has the capacity to repurchase shares.
While Citigroup (C - Free Report) announced a dividend hike of 4% to 53 cents per share, it, too, was disappointed with the results of its stress test. For Citigroup, the Fed predicts its capital ratio to fall to 9.1% in case of a severe economic downturn, while the company’s estimate is 10.6%.
Thus, Citigroup has also sought information from the Fed on its test result.
Moreover, Citigroup is the only large bank whose SCB requirement will increase to 4.3% from 4% following this year’s stress test.
Conclusion
The stress test results and the subsequent increases in payouts by banks show that the industry is well-prepared to confront any challenges.
Yet, banks continue to brace for higher capital requirements from the regulators. This is a major near-term headwind and seems to have held back regional banks from coming up with new capital plans.
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BofA (BAC) Delays Dividend Amid Stress Test Result Discrepancy
Bank of America Corporation (BAC - Free Report) delays announcing its dividend despite passing the Federal Reserve’s annual stress test. This is because there is a significant difference between how the Fed and the company’s risk management predicts BofA to fare in case of a severe recession.
Per BofA’s analysis, it will lose $52 billion in case of a severe economic downturn and its capital ratio will decline to a minimum of 8.3% per cent. However, per the Fed’s stress test results, BofA will lose only $23 billion in a severe economic downturn and its capital ratio will fall to 10.6%.
Hence, BofA has initiated a dialogue with the Fed to understand the difference that arose in other comprehensive income over the nine-quarter stress period between the Fed’s Comprehensive Capital Analysis and Review results and BAC’s Dodd-Frank Act stress test results.
Over the past six months, shares of BAC have lost 14.3% compared with the industry’s decline of 7.4%.
Image Source: Zacks Investment Research
Currently, BAC carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The results of the 2023 stress test, which were announced last week, indicate that banks have sufficient capital to withstand a severe economic downturn.
This year’s annual health check has solidified the notion that large banks are resilient. Results have shown that the 23 participating banks have enough capital to absorb the $541 billion in projected losses on loans and other positions.
Going into the stress test, analysts were forecasting conservative payouts from banks on the back of potential stringent regulatory capital requirements and ambiguity over the macroeconomic backdrop, including probable recession next year.
However, now, after the results have come out pretty well, banks are expected to be subjected to smaller stress capital buffer (“SCB”) requirements, which have opened the doors for bigger-than-expected payouts.
Thus, some of the large U.S. banks, including JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) , said on Friday that they would return more cash to shareholders.
JPM, the largest U.S. bank, intends to raise the quarterly dividend by 5% to $1.05 per share. This follows no change in dividend payout last year.
The company’s chairman and CEO, Jamie Dimon, said, “We continue to maintain a fortress balance sheet with strong capital levels and robust liquidity, and we remain prepared for a broad range of potential outcomes, including potentially higher future capital requirements from the finalization of the Basel III capital rules.”
JPM also plans to continue with its previously announced share repurchase program.
Likewise, Wells Fargo announced plans to hike its dividend to 35 cents per share from the current 30 cents. Also, over the four-quarter period through the second quarter of 2024, WFC has the capacity to repurchase shares.
While Citigroup (C - Free Report) announced a dividend hike of 4% to 53 cents per share, it, too, was disappointed with the results of its stress test. For Citigroup, the Fed predicts its capital ratio to fall to 9.1% in case of a severe economic downturn, while the company’s estimate is 10.6%.
Thus, Citigroup has also sought information from the Fed on its test result.
Moreover, Citigroup is the only large bank whose SCB requirement will increase to 4.3% from 4% following this year’s stress test.
Conclusion
The stress test results and the subsequent increases in payouts by banks show that the industry is well-prepared to confront any challenges.
Yet, banks continue to brace for higher capital requirements from the regulators. This is a major near-term headwind and seems to have held back regional banks from coming up with new capital plans.