“WASHINGTON—The Federal Reserve’s annual test of big banks’ financial health showed the largest U.S. firms are strong enough to withstand a severe economic downturn, a sign that many will get the green light soon to reward investors by raising dividends and buying back shares.
The Fed said 29 of the 30 largest institutions have enough capital to continue lending even when faced with a hypothetical jolt to the U.S. economy lasting into 2015, including a severe drop in housing prices and a spike in unemployment. The Fed’s annual “stress tests” are designed to ensure large banks can withstand severe losses during times of market turmoil.
Only Zions Bancorp, ZION +3.19% a regional lender based in Salt Lake City, posted capital levels during the two-year-downturn scenario that didn’t meet the Fed’s minimum standards. The Fed said Zions had a Tier 1 common capital ratio of 3.5%, below the 5% level the Fed views as a minimum allowance. The ratio measures high-quality capital as a percentage of risk-weighted assets such as mortgages, commercial loans and securities.
The results could buttress the desire of banks—which have seen their profits soar amid an improving economy and severe cost cutting—to return more of that income to shareholders. The six biggest banks earned $76 billion in 2013, just $6 billion shy of their collective all-time high. All U.S. banks earned a record $154.6 billion, according to data compiled by SNL Financial. Some of the biggest financial institutions, including Bank of America Corp.BAC +2.75% and Morgan Stanley,MS +3.08% haven’t boosted dividend payouts since the financial crisis.
The stress-test results will be a factor in the Fed’s decision next week to approve or deny individual banks’ plans for returning billions of dollars to shareholders through dividends or share buybacks. But a good performance on Thursday’s test is no guarantee, since the Fed also will consider more subjective factors such as the strength of a bank’s internal risk management.
On Thursday afternoon, the Fed was expected to privately give banks a preliminary answer on their requests, setting up a week of jockeying for banks that were told “no.” Firms will have until early next week to revise their plans or challenge the Fed’s math before a final decision is issued Wednesday.
Paul Miller, an analyst at FBR Capital Markets, said the results bode well for banks’ approval of capital plans. “There’s nothing in here that I think is a big shocker,” he said. Analysts this year are expecting distributions from banks to be the highest since at least 2007, according to estimates compiled by Thomson Reuters for The Wall Street Journal.
The first stress test took place in the immediate aftermath of the 2008 crisis and helped shore up confidence at a critical juncture for the American financial system. Regulators forced banks to cut their dividends in exchange for billions of dollars in government aid and lenders were prohibited from raising shareholder payouts without U.S. approval.
The Fed said the latest tests show banks are “collectively better positioned” to withstand losses than they were during the financial crisis, after which regulators pushed banks to hold more loss-absorbing capital.
Under the Fed’s “severely adverse” scenario—a deep recession with a rising unemployment rate, steep drop in housing prices and a nearly 50% decline in stock prices over nine quarters—30 banks would have suffered total loan losses of $366 billion, trading losses of $98 billion and a net loss before taxes of $217 billion.
The Fed also raised the bar in this year’s test by….”
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