The Flood Gates Still Aren't Open for Banks -- Yet -- Heard on the Street
December 21 2020 - 6:29AM
Dow Jones News
By Telis Demos
The Federal Reserve has finally started to lift the lockdown on
bank buybacks, but not by so much that investors should be making
big new holiday plans.
Following the results of another stress test, the Fed's dividend
restriction continues, capping them where they were in the second
quarter and limiting them based on recent income. As for the banks
that have cut dividends, it is a mixed bag. Based on FactSet's
fourth-quarter consensus earnings estimates, Capital One Financial
may have capacity to restore its prior dividend; for Wells Fargo,
it is less clear.
Attention will now turn to buybacks, which the Fed will allow
starting in the first quarter. However, dividends and buybacks
together aren't to exceed banks' average quarterly income over the
preceding four quarters. For shareholders, this is quite good but
not yet amazing news.
The new allowance likely won't be big enough to absorb too much
of banks' capital that is in excess of their minimums. The six
biggest U.S. banks now have common equity Tier 1 capital ratios
that are on average more than 2 percentage points above the
requirements set by the June stress test. Importantly, the Fed
didn't for now recalibrate those minimums based on the latest test
results.
Judging from analysts' fourth-quarter earnings estimates and
likely dividends, it is unclear that the other biggest banks --
Bank of America, Citigroup and JPMorgan Chase -- will quite be able
to immediately resume their pre-pandemic quarterly pace of buybacks
in the first quarter. Goldman Sachs and Morgan Stanley look
likelier to be able to do something approximating their prior pace
right away. But it all greatly depends on actual fourth-quarter
results.
Meanwhile, banks' capital cushions may grow even bigger next
year. A combination of good credit performance spurring reserve
releases and tepid loan growth is generally a formula for bumping
up capital ratios. That, in turn, means return on equity could lag
behind profit growth.
The Fed may decide to unbridle the banks later next year, though
its deliberate pace so far suggests that is hardly a sure thing. So
for now, banks will remain in the position of having a lot of
capital to potentially return.
Write to Telis Demos at telis.demos@wsj.com
(END) Dow Jones Newswires
December 21, 2020 06:14 ET (11:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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