By Jesse Hamilton and Yalman Onaran
The Federal Reserve, showing confidence in how banks are weathering the pandemic, gave industry leaders a green light to resume billions of dollars in stock buybacks. Lenders including JPMorgan Chase & Co. and Goldman Sachs Group Inc. said theyâll take the Fed up on its offer.
The loosening of restrictions marks a partial but significant win for firms that have been eagerly awaiting permission to boost capital distributions. Soon after the Fedâs announcement Friday, banks began disclosing plans to resume buybacks as soon as the first quarter.
The boost to shareholder payouts is welcome news for an industry that has been largely left out of the stock market rally, even as profits held up better than many expected when unemployment spiked. The central bankâs relaxed limits came alongside the disclosure that the biggest firms performed well in a second round of 2020 stress tests that assessed how the industry has navigated the Covid-19 tumult.
âPassing was expected; the ability to buy back stock, within limits, was hoped for but not expected,â Susan Katzke, an analyst at Credit Suisse Group AG, said in a note to clients that called the news a âclear positive.â
Based on the new distribution policy, the six biggest US banks could buy back as much as $ 11 billion of shares in the first quarter of next year, assuming fourth-quarter earnings come in at the levels analysts estimate. That would roughly triple their shareholder payouts.
Shares of the six banks all jumped more than 3 per cent in late New York trading following the Fedâs announcement.
âThe banking system has been a source of strength during the past year, and todayâs stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,â Fed Vice Chairman for Supervision Randal Quarles said in a statement. The tests showed that none of the largest banks fell beneath their capital minimums under the Fedâs hypothetical stress scenarios.
Even as buybacks resume, dividends will remain unchanged through March, capped at whatever each bank returned in the second quarter of 2020. The Fed said banksâ payouts to shareholders in the first quarter of next year canât exceed their average quarterly income for 2020.
JPMorgan said Friday that its board has approved up to $ 30 billion in repurchases, though the timing of utilizing that full amount will be subject to âvarious considerations.â The Fedâs modified restrictions would likely prevent the bank from reaching that total in 2021, though the regulator could further loosen rules next year.
Morgan Stanley said its board authorized up to $ 10 billion of repurchases next year, starting in the first quarter.
Citigroup Inc. intends to resume repurchases in 2021, subject to financial conditions, board approval and any changes the Fed makes to capital requirements, Chief Executive Officer Michael Corbat said in a statement.
Wells Fargo & Co. will provide guidance on its plans when posting quarterly results in January. âWhile we expect to have modest capital distribution capacity in the first quarter, we continue to have significant excess capital above regulatory requirements,â CEO Charlie Scharf said in a statement.
A spokesperson for Bank of America Corp. pointed to earlier comments from CEO Brian Moynihan. âWeâll continue to buy back stock as soon as weâre allowed to,â Moynihan told investors at a conference last week.
Calling for prudence
Fed officials had said their decision on shareholder payouts would be based on the results of the stress tests, which were run because annual exams conducted earlier in the year didnât capture Covid-19. For the first time, the agency launched a do-over, using new scenarios based on the current turmoil.
JPMorgan and other large US banks had for months indicated they have more than enough capital to weather the crisis and were ready to resume buybacks. But Democratic lawmakers and consumer groups have been urging the Fed to force banks to stockpile capital as long as the economy continues to sputter.
Fed Governor Lael Brainard has opposed her agencyâs efforts this year to allow limited capital distributions, and she voted against the Fedâs decision to relax the limits further for next year.
âFor several large banks, projected losses take capital levels very close to the minimum requirement, in the range where banks tend to pull back from lending, even before payouts,â Brainard said in a statement Friday. âPrudence would call for more modest payouts to preserve lending to households and borrowers during an exceptionally challenging winter.â
Regulators should be focusing on strengthening the financial system so that it can support customers during the pandemic, Democratic Senator Sherrod Brown of Ohio said. âThis public health and economic crisis is getting worse, not better,â he said in a statement. âThe Fedâs decision allows billions in dividends and bonuses for a select few while millions of Americans are reeling.â
The Fedâs tests show banks have a substantial capital cushion, said David Fanger, senior vice president in Moodyâs financial institutions group. But for some lenders, the extent of payouts allowed âcould lead to a significant decline in capitalization, a clear credit negative,â he said in a statement.
The US is undergoing another wave of the illness, with infection rates and death tallies both spiking. But the economy has so far limped along, doing better than many analysts predicted.
In other jurisdictions — including Europe and the U.K. — regulators have begun relaxing the restrictions theyâd put in place on bank dividends. Yet those overseers still kept a payout cap well below the level the Fed approved.
The buybacks can bring total payouts to 100 per cent of banksâ average net income over the previous four quarters. The firms already distribute about 30 per cent of their profit through dividends. The 20 US-based banks tested by the Fed could buy back $ 14 billion of shares in the first quarter, Barclays Plc analysts estimated in a note.
The new limit still could put a cap on banksâ payouts, as theyâve built up capital buffers over the past year and could afford to eat into that excess by distributing more than they earn in coming quarters.