By Nupur Anand
A man crosses a nearly deserted Nassau Street in front of the New
York Stock Exchange (NYSE) in the financial district of lower Manhattan
during the outbreak of the coronavirus disease (COVID-19) in New York
City, New York, U.S. REUTERS
(Reuters) - The biggest U.S. lenders are expected to clear the Federal
Reserve's annual health check this year, showing they have ample capital
that can be used to boost dividends, analysts said.
The
results of the central bank's so-called “stress tests” on Friday will
determine how much cash lenders would need to hold to withstand a severe
economic downturn. A less strenuous methodology this year means banks
will probably perform better and return more money to investors via
dividends and share buybacks, analysts said.
The
yearly exercise, introduced following the 2007-2009 financial crisis,
is integral to capital planning for the 22 large lenders being tested.
It is also used by banks to determine how much in dividends can be given
to shareholders.
"With
the improved regulatory tone, hopes are high for some reduction in
capital requirements... driven by less harsh stress tests," said Vivek
Juneja, an analyst at JPMorgan. Given banks' high capital levels, he
anticipated they would increase dividends by an average of about 3% and
boost share repurchases.
Tepid
loan growth and a favorable regulatory environment will make banks more
flexible as they manage capital and grow dividends. However, banks may
stay cautious with capital.
"Despite
an improved outlook for capital return, we continue to expect
management teams to remain somewhat conservative nearer-term given
ongoing tariff, economic uncertainty and the timing and the magnitude of
regulatory reform," analysts from Raymond James said in a report.
The scenarios for this year's stress test are also expected to be less onerous versus last year.
"It
includes a smaller decline in U.S. real GDP, a smaller rise in
unemployment rate, smaller declines in short/long-end rates and other
improvements including less aggressive housing and equity pricing
declines," analysts at Jefferies wrote in a note.
In more good news for banks, the tests are expected to only become more manageable for banks going forward. In April, the Fed kicked off
a sweeping effort to overhaul the tests, which would include, in future
years, averaging results to reduce volatility and giving banks more
visibility into how they are graded by the Fed.
"We
view this as a major positive that will help banks and regulators
better align on methodology between internal and Fed-run stress tests,
with the output being less of a black box," said Betsy Graseck, an
analyst at Morgan Stanley. Changes in the process could begin as early
as this year, she added.
Wall
Street firms could also see some relief in their stress capital
buffers, an additional layer of capital that the Fed requires large
banks to hold on top of minimum capital requirements.
Goldman Sachs (GS.N) and Morgan Stanley (MS.N), which saw their buffers increased last year, are "poised for improvements this year," the analysts at Jefferies wrote.
Meanwhile, Citibank (C.N) and M&T Bank (MTB.N) could see a slight uptick in their capital requirements, said analysts at Keefe, Bruyette & Woods.
Overall,
analysts expect the regulatory environment for big banks to be more
benign under the second administration of U.S. President Donald Trump.
"Stress tests are likely to be less stressful in Trump 2.0," analysts at Raymond James said.
Reporting by Nupur Anand in New York, editing by Lananh Nguyen
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