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JEROME Powell is putting big United States banks through two stress tests.
The Federal Reserve (Fed) chair’s merciless interest-rate increases are hitting asset values hard, and that’s likely to prove painful in second-quarter earnings and beyond.
Share buybacks by most big banks are already slower this year than last as they cope with billions of losses on government bonds they own and potentially on debt deals underwritten for clients.
Meanwhile, the just-published results of the Fed’s theoretical crisis exams showed big banks have plenty of capital to survive a severe shock.
It ran tougher scenarios than last year, including a bigger rise in unemployment and drop in home prices.
At the same time, the Fed has already told JPMorgan Chase & Co, Citigroup Inc and Goldman Sachs Group Inc to build in bigger cushions next year to guard against the systemic risks they present.
And yet for shareholders, the news is that dividends and buybacks in 2023 will still likely be extremely healthy.
In forecasts made ahead of the Fed’s stress test result, JPMorgan was expected to lead the pack with dividends and buybacks in 2023 adding up to US$19bil (RM84bil) to US$21bil (RM92bil), according to estimates from analysts at Barclays and Jefferies.
That is way down from 2021’s total of nearly US$30bil (RM132bil), but that included profits held over from 2020 during the depth of the Covid crisis.
Bank of America Corp (BofA) and Wells Fargo & Co are next in line, both forecast by Barclays to return a total of more than US$15bil (RM66bil) and by Jefferies to return nearly US$21bil (RM92bil), again much lower than last year.
Morgan Stanley follows, then Citigroup, and Goldman brings up the rear with estimated payouts of US$6bil (RM26bil) (Barclays) to nearly US$8bil (RM35bil) (Jefferies).
The banks can start outlining their capital plans next week.
Next year’s buybacks are likely to be better than this year’s, especially for the big deposit taking commercial banks.
JPMorgan has already slowed share repurchases this year in part because of declining values of Treasuries held on its books as interest rates rose.
Executives at BofA, Wells and Citi made cautious comments about stock repurchases during first-quarter earnings calls.
All four suffered billions in unrealised losses in the first three months of the year and are likely to do so again because of further Fed rate increases.
Very short-term Treasury yields and very long-term ones have risen more in the second quarter than in the first.