Tougher Federal Reserve stress tests forced six U.S. banks, including JPMorgan Chase & Co., to scale back proposals for doling out more cash to shareholders. Two -- Goldman Sachs Group Inc. and Morgan Stanley -- agreed to freeze total payouts at previous years' levels.
American Express Co., M&T Bank Corp. and Keycorp also had to temper initial requests to distribute cash, according to results posted Thursday. Twenty-eight other firms can proceed with their original proposals to increase stock buybacks and dividends after the Fed found they'd still hold enough capital to weather a hypothetical economic shock. The regulator failed a U.S. subsidiary of Deutsche Bank AG, citing "widespread and critical deficiencies" in its planning, limiting the unit's ability to send capital home to Germany.
Big banks may still be able to deliver the $170 billion in combined payouts that Wall Street analysts had predicted for the coming 12 months -- about $30 billion more than in the previous four quarters. On average, firms will distribute about 95 percent of their profits, the Fed said, in line with analysts' estimates.
And not every hiccup was a major surprise: While JPMorgan was expected to dramatically increase distributions, several analysts predicted Morgan Stanley would increase its payout only slightly, and that Goldman Sachs would return less cash. In the end, Morgan Stanley and Goldman pledged to keep their payouts at the previous year's level, according to the Fed. JPMorgan said it will boost its quarterly dividend by 43 percent and buy back as much as $20.7 billion in shares.
Many banks subject to the test began disclosing their plans after results were posted. Wells Fargo & Co. said it will repurchase up to $24.5 billion of stock and boost its quarterly dividend by 4 cents a share. AmEx said it will buy back as much as $3.4 billion and increase its dividend 11 percent.
JPMorgan climbed 2 percent in late trading as of 4:55 p.m. in New York. Wells Fargo gained 3.3 percent while AmEx rose 0.7 percent.
The six lenders that squeaked through took what has become known as a mulligan, lowering their initial proposals for distributing capital. Shareholders at Goldman and Morgan Stanley got hints of trouble last week, when the pair barely passed the test's first round, which is based on continuing past payout levels. Their performance in that phase prompted both firms to race out statements, urging investors not to underestimate the firms' ability to make payouts.
Goldman Sachs has already used the mulligan twice since 2013, when the option was introduced. Morgan Stanley used it once. It provides an advantage, letting the firms figure out the maximum they can pay.
This time, even their resubmitted plans were projected to leave them short of regulatory minimums in a severe crisis, the Fed said. The regulator said that in allowing them to pass, it considered that they had to book one-time charges in the fourth quarter linked to U.S. tax cuts -- which will boost future earnings.
The Fed's hypothetical scenarios were much harsher this year, including a 65 percent drop in stock prices, which created bigger theoretical losses for firms that have large capital markets businesses. Goldman's and Morgan Stanley's earnings rely more on trading and wealth management than bigger rivals who also do consumer and commercial banking.
Business on 06/29/2018