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Four big U.S. banks raise dividends after stress tests

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© Reuters. A person walks past a Bank of America sign in the Manhattan borough of New York City, New York, U.S., January 19, 2022. REUTERS/Carlo Allegri

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By Carolina Mandl and Michelle Price

NEW YORK/WASHINGTON (Reuters) – Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) hiked their dividends on Monday after the U.S. banks cleared their annual stress test exercise last week.

The U.S. Federal Reserve said on Thursday the country’s largest lenders could easily weather a severe economic downturn, giving them a clean bill of health and paving the way for them to redistribute excess capital to shareholders.

The results allowed banks to announce higher dividends despite the Fed’s test being tougher than in 2021, pushing up some lenders’ required capital buffers more than expected.

However, JPMorgan (NYSE:JPM) & Chase and Citigroup (NYSE:C) kept their payout flat, as a challenging economic environment may require more capital. Citi will likely give an update on its capital plans at its upcoming earnings on July 15, a source familiar with the situation said.

This year’s dividend hikes were more subdued than in 2021, a bumper year for big bank capital payouts, after lenders amassed piles of excess cash during the pandemic to cover loan losses that never materialized. Morgan Stanley, for instance, doubled its dividend in June 2021.

Under the annual stress test exercise established following the 2007-2009 financial crisis, the Fed assesses how banks’ balance sheets would fare against a hypothetical severe economic downturn. The results dictate how much capital banks need to be healthy and how much they can return to shareholders.

Goldman Sachs said on Monday it would hike its dividend by 25%, to $2.50 per share, and Morgan Stanley said it plans an increase to 77.5 cents per share and a share buyback program of $20 billion. Bank of America raised its dividend by 5% to 22 cents per share and Wells Fargo said it expects to hike its dividend to 30 cents from 25 cents a share.

Shares in Morgan Stanley jumped 3.5% after hours, while Goldman rose 1.4%.

JPMorgan maintained its dividend at $1.00 a share, citing “higher future capital requirements.” Citi also said it would be able to keep it flat at 51 cents “in a range of stress scenarios.”

The test sets each bank’s “stress capital buffer,” an extra capital cushion on top of the regulatory minimum. The size is determined by each bank’s hypothetical losses under the test.

Banks announced their new stress capital buffers (SCB) on Monday, which come into effect later this year, giving them time to rejig their balance sheets.

Citigroup, JPMorgan and Bank of America said their stress capital buffer would increase, confirming analysts’ expectations. At Bank of America and JPMorgan, that increase would be driven by higher credit provisions, whereas Citi would be hit by higher trading losses, lower fee income and higher expenses, analysts said based on the tests’ results.

“Each of these banks saw estimated SCBs up by 80-100 bps, relative to limited excess capital, which is greater than what we or the market anticipated,” Goldman Sachs analysts wrote on Friday, after the stress test results were announced.

As a result, analysts were expecting those three banks would keep dividends flat and eliminate or reduce share buybacks to boost their capital.

Gerard Cassidy, head of U.S. Bank Equity Strategy at RBC Capital Markets, said on Monday, ahead of the banks’ announcements, that rising loan growth and accounting losses banks have taken on banks bond portfolios due to interest rate hikes, have put pressure on banks’ capital.

“It’s clearly going to be different this than last year for those reasons,” he added.

See below the announced changes in dividends.

Bank Previous New

$1.00 $1.00

JPMorgan

& Chase

$2.00 $2.50

Goldman

Sachs

$0.51 $0.51

Citigroup

$0.70 $0.775

Morgan

Stanley

$0.21 $0.22

Bank of

America

$0.25 $0.30

Wells

Fargo

Stock Markets

Morgan Stanley: bear market rally to continue

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One of Wall Street’s best-known bears, Michael Wilson, thinks the S&P 500 will rise another 7% before turning down, so the bear market rally will continue for now, writes Market Watch.

After the Dow Jones, S&P 500 and Nasdaq Composite joined their strongest weekly gains since at least May last Friday, Wilson, who is chief strategist and head of U.S. equity markets at Morgan Stanley (NYSE:MS), told clients that there could be another 5% to 7% before the downward trajectory of U.S. stocks resumes during the latest bear market recovery.

Wilson has held a bearish view of the stock market for about 2 years and correctly predicted a sell-off this year.

Wilson explained in a research note sent out to clients on Monday that a pullback in the 38-50% drop in the stock market this year “would not seem like something unnatural, not consistent with the previous bear market rally.”

While growth concerns have triggered a sell-off in commodities and lowered inflation expectations, the fact that the U.S. economy is already slowing and heading toward recession means that any market rally is likely to be short-lived, and U.S. stocks are likely to eventually fall.

Wilson mentioned in the note that the bear market is not over yet, although it may appear otherwise in the next few weeks as the market takes the rate cut as a sign that the Fed can still manage a “soft landing” and prevent a meaningful revision to earnings forecasts.

U.S. stocks rose last week as investors now hope the slowing economy and falling commodity prices may inspire the Fed to raise interest rates less sharply. Federal funds futures, a derivative used by investors to bet on the pace of the Fed’s monetary policy changes, estimate with a high probability that the Fed will be forced to start cutting interest rates again as soon as next summer.

They also consider the lower peak in the federal funds rate: it will peak around 3.5% at the end of 2022 instead of 3.75% just a couple of weeks ago. Wilson also pointed out the drop in Treasury yields: the 10-year Treasury bond yield went from 3.230% to a low of 3.07% on Friday before rebonding again on Monday.

Wilson expects the S&P 500 index to fall to around 3,400 points if the U.S. Federal Reserve manages to get a “soft landing” for the economy — which Fed Chairman Jerome Powell said last week would be “a very difficult thing to do.”

Wilson expects that if the U.S. economy plunges into recession, the S&P 500 index will fall to around 3,000 points. In any case, Wilson believes that U.S. stocks are still highly valued because the risk premium — that is, the measure of compensation that investors receive for the extra risk of owning stocks instead of bonds — remains about 300 basis points higher than the 10-year Treasury bond yield, which is considered a “risk-free rate.” 



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Stock Markets

Easing chip shortages to help Volkswagen in H2 – CEO

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© Reuters. FILE PHOTO: Volkswagen logo is pictured at the 2022 New York International Auto Show, in Manhattan, New York City, U.S., April 13, 2022. REUTERS/Brendan McDermid/File Photo

BERLIN (Reuters) – Volkswagen (ETR:VOWG_p) sees a strong second half of 2022 and expects progress in catching up with rival Tesla (NASDAQ:TSLA) as easing chip shortages start to offset supply chain bottlenecks and rising costs, the carmaker’s CEO said on Tuesday.

“We are earning more than ever,” Chief Executive Herbert Diess said at a works meeting, adding Volkswagen is ramping up electric vehicle volumes in its biggest markets in Germany and China thanks to easing semiconductor shortages.

This should allow the carmaker to narrow the Volkswagen-Tesla gap this year and meet its goal of becoming market leader by 2025 if it seizes the moment while the U.S. electric car maker burns cash on large investments, the CEO said.

“Elon (Musk) has to ramp up two highly complex factories in Austin and Gruenheide at the same time – as well as expand production in Shanghai. That’s going to take strength out of him,” Diess said.

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Stock Markets

Reliance Chairman Mukesh Ambani steps down as director of telecom arm

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© Reuters. FILE PHOTO: Mukesh Ambani, Chairman and Managing Director of Reliance Industries, arrives to address the company’s annual general meeting in Mumbai, India July 5, 2018. REUTERS/Francis Mascarenhas

BENGALURU (Reuters) – Reliance Industries Chairman Mukesh Ambani has stepped down as director of Reliance Jio Infocomm Ltd, the conglomerate’s telecom arm said on Tuesday.

Reliance Jio said https://refini.tv/3Nrs773 it has appointed Mukesh’s son and non-executive director Akash Ambani as the chairman of its board. Akash has been involved with the telecom unit since its launch in late 2016, where he started as a director.

India’s telecoms sector had been upended after the entry of Jio, which triggered a price war that forced some rivals out of the market and turned profits into losses.

Jio, which started out offering mobile teleservices, has been aggressively investing in services like internet broadband and forging ties with handset makers to launch low-cost smartphones and providing 5G services.

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