Intelligent Financial APP noticed that the Federal Reserve will release its annual stress test results after Wednesday's closing, which will determine the amount of capital that large banks need to set aside to withstand financial shocks.
The test will calculate the stress capital buffer (SCB) level for each bank. This in turn shows how much capital they will be allowed to return to shareholders in the form of dividends and share buybacks.
Morgan Stanley analyst Betsy Graseck said in a recent report to clients that the 2024 test should produce similar SCBs as the 2023 test for the largest banks (class 1 to 3).
This result should encourage globally systemically important banks with significant excess capital to increase their share buyback efforts. "Among the GSIBs, we expect a median of 14.8%."
"Share buybacks in 2025 are expected to increase by 182% compared to the last time they were proposed in the final phase of the Basel agreement," Graseck said.
She pointed out that one uncertainty for class 1 and 2 banks is whether the Fed will change the calculation method for accumulated other comprehensive income (AOCI). "If the Fed's AOCI method is different from last year, it could boost the SCB of banks with large AFS securities portfolios." Citigroup should be the least affected because AOCI only affects the bank by 30 basis points, while the median impact on all class 1 and 2 banks is 40 basis points.
Because the Fed regulates banks in a tiered manner--the larger the bank, the stricter the supervision--not all banks are subject to the test every year. Banks with assets between $100 billion and $250 billion (class 4) were last tested in 2022.
Graseck said the stress test this year is tougher than in 2022, which is an upward risk for banks in this category.
HSBC Bank analyst Saul Martinez believes that $JPMorgan (JPM.US)$ and $Bank of America (BAC.US)$is in a favorable position, even under the revised Basel III endgame rules. As for $Wells Fargo & Co (WFC.US)$, he expects that, even with the potential Basel endgame requirements, an SCB similar to those of previous years also means "considerable excess capital".
He said that this year, Tesla's capital expenditures related to AI will reach $10 billion, about half of which are internal expenses, mainly Tesla-designed AI inference computers, sensors in cars, and Dojo.$Citigroup (C.US)$has a similar SCB level to last year and lower capital flexibility compared to other currency center banks.
Jefferies Financial analyst Ken Usdin pointed out that "AOCI is the heaviest burden on regional banks, and the regulation is expected to remain in the final rule of Basel III."
"Given the expected softening of B3 results, the increased likelihood of a soft landing, the weakening loan demand, and the overall upward trend in buyback expectations," Usdin wrote in a report in early June.
GSIBs have high expected capital returns," and "they all bought back stocks in the first quarter and are expected to continue to do so throughout the year."
Usdin predicts an average dividend payout of around 68% (or about 7% of market capitalization) for the banks studied by Jefferies Financial in 2025, and is particularly bullish on $M&T Bank (MTB.US)$, $Bank of New York Mellon (BK.US)$, $State Street (STT.US)$And$Wells Fargo & Co (WFC.US)$.
Editor/Somer