martes, 8 de mayo de 2018

martes, mayo 08, 2018

How the Fed Keeps Bank Stocks Down

Bank shares are being held back by uncertainty over how the Fed’s stress tests would affect dividends and buybacks

By Aaron Back

Analysts estimate that investment banks Morgan Stanley and Goldman Sachs will be hardest hit by the Federal Reserve’s proposed new capital requirements. Photo: brendan mcdermid/Reuters 


Bank profits are doing great; bank stocks, not so much. One big reason is uncertainty over future dividends and buybacks.

This is ultimately in the hands of the Federal Reserve. The central bank determines how much large banks are allowed to pay out to shareholders—from July through the following June every year—through its annual stress tests. This year, bankers are warning that the tests will be particularly tough.

As in previous years, the Fed assumes in its “severely adverse” scenario that the unemployment rate spikes to 10% over seven quarters. With unemployment at 4.1% this year, compared with 4.7% last year, the jump would be bigger.

“You need some very severe shocks to hit 10%,” Morgan Stanley Chief Executive James Gorman said on a call with analysts. “We are prepared for a range of outcomes this year.”

Future stress tests will introduce even more uncertainty. The Fed’s proposed new capital requirements include a new layer of funds called the “stress capital buffer,” which can change each year depending on how banks fare in the stress tests.

Analysts estimate that investment banks Morgan Stanley and Goldman Sachs will be hardest hit by the change, but every bank undergoing the tests may face increased variability in their capital requirements from year to year.

“The question is, is that going to introduce uncertainty? And is that going to force all these banks to have…more of a buffer?” asked Bank of America Chief Financial Officer Paul Donofrio on a conference call.

The rules may yet change. JPMorgan Chief Financial Officer Marianne Lake said she hopes “there will be some sort of mechanism considered to accommodate, smooth or otherwise allow for things not to be whipsawed around.”

Bankers measure their words carefully when talking about their most powerful regulator.

These comments suggest they aren’t happy.

There is a case to be made that some banks shouldn’t be prioritizing share buybacks right now anyway, given high valuations. In late 2016, JPMorgan Chief Executive James Dimon said buybacks weren’t a great use of capital when valuations get high, though he didn’t specify at what level. Since then the bank’s valuation has risen from 1.66 times tangible book value to 2.09 times.


BUYBACK BONANZA
Total share repurchases since June 2017:

Source: The companies




And when shareholders don’t get their buybacks they get frustrated. That was made clear this week when Goldman Sachs said it doesn’t expect to do any buybacks during the second quarter due to an earlier tax charge. Its shares promptly fell 1.6%, despite excellent earnings.

To keep shareholders happy, banks likely need to buy back as many shares as the Fed will let them. The problem right now is that neither the banks nor their shareholders have a clear idea how much that will be.

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