The nation’s largest banks, back to making big profits a decade after the financial crisis, are set to pay out billions of dollars to their shareholders.
The banks’ regulator, the Federal Reserve, signed off on the payments after the banks passed annual stress tests, whose results came out on Thursday. The Fed carries out the tests, which were introduced after the crisis, to assess how big banks would fare in a deep recession.
After passing, the six largest United States institutions are now free to distribute over $125 billion in stock buybacks and dividend payments. One revealing exercise is to compare the size of the banks’ requested payouts with the profits that analysts expect the banks to make in the second half of this year and the first half of next, the period covered by the capital plans. On average, those six banks plan to distribute 102 percent of their profits to shareholders.
Wells Fargo asked to pay out 141 percent of the earnings that Barclays’ analysts expect it to generate over the next 12 months, the highest of the bunch. The Fed, as punishment for a string of scandals, has told Wells Fargo that it cannot increase the size of its balance sheet until the Fed is satisfied that the bank has rectified its problems. As a result, Wells Fargo appears to be paying out capital it might otherwise have used to finance a greater amount of loans. Its payout ratio in 2017 was 99 percent, according to Barclays.
Citigroup, whose fortunes have picked up in recent years, could pay out 128 percent of its earnings after the latest stress tests, compared with 119 percent in 2017.
Morgan Stanley and Goldman Sachs have much lower numbers, 80 percent and 69 percent. To get the Fed’s approval for their capital plans, both firms had to reduce their requested payouts. The two banks’ percentages may be lower because the stress tests effectively leave them with less capital to distribute. And that might happen because the tests may be tougher on Wall Street activities than, say, traditional lending.
Another reason may be that Morgan Stanley and Goldman Sachs simply have less excess capital, resulting in there being less to distribute in each stress test cycle.
