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BofA (BAC) Plans Dividend Hike Despite Stress Test Discrepancy
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The wait is finally over as Bank of America Corporation (BAC - Free Report) has announced plans to hike its quarterly dividend by 9.1% to 24 cents per share, effective third-quarter 2023. The dividend increase is, however, subject to approval from BAC’s board of directors.
Prior to this hike, the company announced a dividend increase of 4.8% in July 2022, following a 17% hike in July 2021. Moreover, in October 2021, BAC’s share repurchase plan of $25 billion was renewed (replacing the April 2021 authorization).
Despite passing the 2023 stress test, BAC delayed announcing its dividend because there was a significant difference between how the Federal Reserve and the company’s own risk management predicted BofA to fare in case of a severe recession.
BofA estimated that it would lose $52 billion in case of a severe economic downturn and that its capital ratio would decline to a minimum of 8.3% per cent. However, per the Fed’s stress test results, BofA would lose only $23 billion in a severe economic downturn and its capital ratio would fall to 10.6%.
Thus, BofA initiated a dialogue with the Fed to understand the difference between the Fed’s Comprehensive Capital Analysis and Review results, and BAC’s Dodd-Frank Act stress test results.
While announcing plans for the dividend increase, Bank of America said that the discussions with the Fed are ongoing.
Over the past six months, shares of BAC have lost 14.2% compared with the industry’s decline of 7.2%.
Notably, the results of this year’s annual health check indicate that banks have sufficient capital to withstand a severe economic downturn.
The stress test 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, the impressive results have opened the doors for bigger-than-expected payouts.
Thus, most of the large U.S. banks, including JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) , said 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.
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) Plans Dividend Hike Despite Stress Test Discrepancy
The wait is finally over as Bank of America Corporation (BAC - Free Report) has announced plans to hike its quarterly dividend by 9.1% to 24 cents per share, effective third-quarter 2023. The dividend increase is, however, subject to approval from BAC’s board of directors.
Prior to this hike, the company announced a dividend increase of 4.8% in July 2022, following a 17% hike in July 2021. Moreover, in October 2021, BAC’s share repurchase plan of $25 billion was renewed (replacing the April 2021 authorization).
Despite passing the 2023 stress test, BAC delayed announcing its dividend because there was a significant difference between how the Federal Reserve and the company’s own risk management predicted BofA to fare in case of a severe recession.
BofA estimated that it would lose $52 billion in case of a severe economic downturn and that its capital ratio would decline to a minimum of 8.3% per cent. However, per the Fed’s stress test results, BofA would lose only $23 billion in a severe economic downturn and its capital ratio would fall to 10.6%.
Thus, BofA initiated a dialogue with the Fed to understand the difference between the Fed’s Comprehensive Capital Analysis and Review results, and BAC’s Dodd-Frank Act stress test results.
While announcing plans for the dividend increase, Bank of America said that the discussions with the Fed are ongoing.
Over the past six months, shares of BAC have lost 14.2% compared with the industry’s decline of 7.2%.
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.
Notably, the results of this year’s annual health check indicate that banks have sufficient capital to withstand a severe economic downturn.
The stress test 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, the impressive results have opened the doors for bigger-than-expected payouts.
Thus, most of the large U.S. banks, including JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) , said 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.
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.