Banks To Raise Payouts Ignoring Tougher Stress Test

The Fed will be announcing the results of bank stress tests on Jun 21 and results of its Comprehensive Capital Analysis Review ("CCAR") on Jun 28. The tests, which are an annual affair and a must for banks since the 2008 financial meltdown, are designed to ensure that they are in a healthy position to handle crisis during an economic downturn. Looking back, President Donald Trump in May signed the biggest rollback of bank regulations since the global economic downturn into law.

The law has been designed to relax rules for all but the largest banks. The move is likely to significantly benefit community banks. And apart from suburban and rural banks, the new law is also expected to benefit regional and medium-sized institutions. Bank stocks have been performing well ever since Trump came to power and with Fed having already made two rate hikes this year, banks are likely to finally get benefited.

New Stress Test to Benefit Banks

Stress tests have been in place since 2008 and are considered one of the most important measures to assess the ability of banks to withstand an economic crisis. However, in May, Trump signed the biggest rollback of financial regulations since the Dodd-Frank Act came to effect in 2010. The new law has raised the assets threshold for banks that are considered too important to fail from $50 billion to $250 billion. In doing so, it excluded all banks except the largest from stringent regulatory supervision.

This certainly has freed small banks from the burden of being considered too big to fail. Thus the likes of SunTrust Banks, Inc. (NYSE:STI) and BB&T Corporation (NYSE:BBT) will no longer need to submit themselves to periodic stress tests or submit plans known as living wills. Moreover, the new law cuts down mortgage loan data reporting requirements for most banks.

The largest banks on the other hand will have to pass a stricter stress test. However, increasing the threshold from $50 billion to $250 billion could provide the Federal Reserve with the “political cover” to further ease regulations governing such stress tests.

Moreover, six foreign banks, namely Deutsche Bank (DE:DBKGn) Aktiengesellschaft (NYSE:DB) , BNP Paribas (PA:BNPP) SA (OTC:BNPQY) , Credit Suisse (SIX:CSGN) Group AG (NYSE:C) , Barclays PLC (NYSE:C) , Royal Bank of Canada (NYSE:RY) and UBS Group AG, have been included this year for the first time that will have to undergo the stress test.

Banks to Pay Record Dividends

Despite a tougher stress test, the largest U.S. banks are expected to pay out more than what they earn for the first time since the economic crisis. According to a Financial Times report, shareholders of 22 of the largest lenders in the United States are estimated to receive around $170 billion in dividends and stock buyout in 2018, almost 25% more than last year.

Among these, JP Morgan Chase & Co (NYSE:JPM) , Wells Fargo & Company (NYSE:WFC) , Bank of America (NYSE:BAC) Corporation (NYSE:C) and Citigroup Inc (NYSE:C) are leading the race. Per a Bloomberg report, JP Morgan Chase, Wells Fargo and Bank of America is expected to pay out more than 100% of their profits over the next four quarters. These banks are likely to be followed by The Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) . JP Morgan has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

This implies that the largest commercial banks are most likely to pass the Fed’s stress test. Moreover, the Fed too thinks that the banking sector has successfully entered the next stage of its recovery since the financial crisis. Moreover, the Fed has already raised interest rates twice this year, which has resulted banks in charging their customers more, thus making their financial position even better.

Summing Up

The new law certainly has made things easier for small commercial banks. On the other hand, the large banks are likely to announce record payouts to their shareholders for the first time since the economic crisis, which proves that they are in a position to comfortably pass the stress test.

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