Washington June 24 2024: Big U.S. lenders are expected to show they have ample capital to weather any renewed turmoil during this week’s Federal Reserve health checks, but will be conservative on investor payouts amid economic and regulatory uncertainties, analysts said.
The central bank on Wednesday will release the results of its annual bank “stress tests” which assess how much cash lenders would need to withstand a severe economic downturn and how much they can return to investors via dividends and share buybacks.
The results come a year after three large banks failed and as higher Fed interest rates continue to squeeze regional lenders’ margins and their commercial real estate (CRE) portfolios. Weakening consumer demand has also dampened sentiment on the trajectory of the economy.
With more mid-sized banks in the mix this year, the tests should provide fresh insight into the health of those lenders.
Introduced following the 2007-2009 financial crisis, the annual exercise is integral to banks’ capital planning.
The results will also likely fuel Wall Street banks’ campaign to ease draft capital hikes proposed by the Fed, which they say are unnecessary because big banks are already flush with cash.
Bank groups will be scouring Wednesday’s results for evidence that boosts their case, while being cautious on payouts since big dividends and buybacks could hurt banks’ argument that extra capital demands would impede their capacity to lend.
“The stress test could be used as a proxy battle in the overall capital regulatory reform war,” said Ed Mills, an analyst at Raymond James. “There could be some increase in returning capital to shareholders but it is expected to be modest as capital norms are yet to be finalized.”
This year 32 lenders will be tested. Wall Street giants JPMorgan Chase (JPM.N), Citigroup (C.N), Bank of America (BAC.N), Goldman Sachs (GS.N), Wells Fargo (WFC.N), and Morgan Stanley (MS.N), usually attract the most scrutiny.
Citi and Goldman, as well as smaller lender M&T Bank (MTB.N), are expected to perform well due to changes in their balance sheet mixes, said analysts at Keefe, Bruyette & Woods (KBW).
With some lingering investor jitters about regional banks, mid-sized lenders including Citizens, KeyCorp (KEY.N), and Truist (TFC.N), are likely to be in the spotlight too, as will Discover Financial Services (DFS.N), whose compliance problems helped make it a takeover target.
