17 July 2019

Investors Await Details on Bank Dividends

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Final results of the Federal Reserve’s annual stress tests are expected to be released after the market closes Wednesday, followed by a bevy of new dividend and share-buyback announcements from the biggest U.S. banks. Overall, analysts expect all 24 U.S. banks that have taken the test in recent years to increase dividends in 2015. That would represent the fifth year in a row of a cumulative increase for the 24 banks and put the payouts at their highest levels since 2008, according to data provided by Thomson Reuters. On a per-share basis, dividends are expected to increase about 11% from 2014 at the 24 banks, which make up the bulk of the 31 global banks tested.

Of course, some banks may disappoint investors because the Fed either nixes their capital-return plans or requests a scaled-down version in order to keep the banks well capitalized in case of another financial crisis. Goldman Sachs Group Inc., in particular, drew worries from some analysts last week after one of the firm’s capital ratios only narrowly surpassed a Fed minimum.

One sign of anxiety: Some analysts lowered their estimates for 2015 dividends after the Fed’s initial round of stress tests were disclosed last Thursday. Some firms have been playing down expectations in recent months.

At a private meeting in December, Morgan Stanley Chief Executive James Gorman told some large shareholders not to expect a windfall of capital returned to them this year in the form of buybacks and dividends, according to people who attended. The largest U.S. banks have been digesting a spate of new rules on capital, leverage and liquidity, Mr. Gorman said, according to the people. Buybacks and dividends, which typically enrich shareholders and boost a bank’s profitability measured by return on equity, should jump in 2016, he said, as the banks continue to adapt.

On Wednesday, banks not only have to satisfy the Fed’s more subjective qualitative requirements on issues such as risk management and loss measurement, which have become more rigorous every year, but they also have to administer payouts that beat expectations.

Some of the biggest dividend gainers are expected to be banks such as Citigroup Inc., which failed its stress test on qualitative grounds last year. This year, analysts foresee the bank, which is run by CEO Michael Corbat, paying quarterly dividends of about seven cents a share, up from a penny.

J.P. Morgan Chase & Co., the nation’s largest bank by assets, is expected to increase its dividend by about 6%, but some analysts, such as Citigroup’s Keith Horowitz, have lowered dividend expectations in recent days in response to details released last week.

The average dividend payout ratio—the ratio of dividends to net income—is set to increase slightly to 25% this year, said Glenn Schorr, an analyst with Evercore. Mr. Schorr expects the figure to increase to about 35% in the coming years among many of the banks subjected to the Fed’s stress test.

Click here to access the full article on The Wall Street Journal. 

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