Top Banks Announced Dividend Hikes After Passing Stress Tests; the Next Point of Interest is the Upcoming Q2 Earnings Season.
The 2023 bank stress test results indicate that all 23 banks are capable of lending to households and businesses even in the face of severe global recession, along with increased stress in commercial and residential real estate markets, as well as corporate debt markets. The largest 23 banks would lose $541 billion in the severe recession scenario, with Capital ratios declining by 2.3% to 10.1% and still above the requirement of 4.5%.
Two of the largest banks, Bank of America and Citi, questioned the test result on July 3 as their projections differed significantly from the Fed's.
In Bank of America's case, the discrepancy lies in "Other Comprehensive Income during the 9-quarter stress period between the Federal Reserve's CCAR results and Bank of America's Dodd-Frank Act stress test results".The difference indicates that Bank of America's estimate is more pessimistic than the Fed's, with a net loss before tax of $ 52.3 billion in its projections, much more than Fed projections of $ 22.9 billion. Besides, Citi also initiated dialogue with the Fed to understand differences in Non-Interest Income over the nine-quarter stress period between the Federal Reserve's CCAR results and Citi's Dodd-Frank Act Stress Test results.
Several Wall Street analysts also question the distortion of the Fed's stress test:
Dick Bove of Odeon Capital: "The Federal Reserve checked bank balance sheets at the end of 2022, which means that the test results on Wednesday local time did not fully reflect the consequences of the banking crisis during the year."
Chris Kotowski of Oppenheimer: "Will Wells Fargo, which has a relatively small trading business, lose 37% more on transactions than Bank of America, which owns Merrill Lynch? Is this really going to be the case?"
The safe results paved the way for banks to make share buybacks and pay dividends to investors. As Silicon Valley Bank's failure hurt the investors' confidence in the banking sector, the dividend hikes of these large banks could be seen as a reward to investors who persevered through uncertainty.
JPMorgan Chase, Wells Fargo, Goldman Sachs, and Morgan Stanley immediately announced plans to raise quarterly dividends on June 30. Especially, Wells Fargo declared to raise its third-quarter 2023 common stock dividend to 35 cents per share from 30 cents per share, up by 17%. Citi has seen the smallest increment, from 51 to 53 cents, up 4%. Although delayed due to unresolved stress test discrepancy, Bank of America also hiked its quarterly dividend from 22 cents per share to 24 cents per share this Wednesday.
For investors, the dividend hikes mean a more attractive annualized stock yield and closer to the historically higher levels, which implies that the management of banks believes the stock to be undervalued relative to historical prices.
As large banks such as JPMorgan Chase, Citigroup, and Wells Fargo will kick off the Q2 U.S. earnings season on July 14, we have compiled both the dividend hike plan and Bloomberg analysts' Q2 revenue and earnings projections for these top-tier American bank stocks. Despite the pressure on the industry, which banks will emerge as front-runners remains to be expected?
Source：Bloomberg, Financial Times, Marketbeat
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