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Excess capital availability in 2019 stress tests allow banks to hit dividend payout targets
Ordinary payout from US banks is expected to increase by 6.5% to $44.7bn
• Easier stress test scenarios compared to 2018 were positive for dividend increases according to the results of the Federal Reserve's annual exams, despite the decrease in the number of firms
• All 11 US banks passed with Goldman Sachs (GS), PNC Financial Services Group (PNC) and State Street Corporation (STT) exceeding our expectations
• Tougher card loss model placed Capital One Financial Corporation (COF) YoY dividend growth at risk, and will reverberate for firms in the extended stress test cycle in 2020
Extended Stress Test Cycle Presents New Top Payers
Fewer firms participated in the 2019 stress test cycle, falling from 35 last year to 18 this year. The biggest increases last year were driven by SunTrust Banks (STI), Regions Financial Corporation (RF), and Citizens Financial Corporation (CFG), who are part of the latter group and will next undergo CCAR in 2020. Rather, the banks that increased their dividend less than 5% in CCAR 2018 wound up driving dividend growth in CCAR 2019 with a median YoY increase of 18% amongst US banks.
The easier stress tests underpinned a significant part of the growth in aggregate payouts. The 18 banks tested comprise approximately 70% of the total assets of all US financial services companies and contribute to 82% of aggregate dividends paid by the sector. For instance, median US banks saw stressed CET1 ratios up 2.5% and Tier 1 up by a median 80bps under the Federal Reserve's adverse scenario. This had a meaningful effect on banks' payout ratio, which rose from 21% in CCAR 2018 to 32% in 2019. The minor difference is attributed to the less restrictive inputs.
Stressed ratios increased most from last year for State Street Corporation (STT), Bank of America Corporation (BAC), Morgan Stanley (MS) and Citigroup (C), who we note kept their dividend flat Q-o-Q, or increased $0.04-$0.05 YoY, in line with previous year's trend. Both JPMorgan (JPM) and Capital One Financial Corporation (COF) submitted adjusted capital actions to the Federal Reserve to ensure their projected CET1 met the minimum 4.5% stipulated by the Board. The respective 70bps and 20bps adjustment favourably impacted JPM's dividend, permitting an increase of 13% YoY.
In our forecasts we assumed Goldman Sachs (GS) would only slightly increase their dividend by $0.05 in Q3, a staggering difference from the $0.40 increased announced by the company on Thursday, June 27. The potential fines related to 1MDB attributed to our projected aggregate payout of $1243m in FY19 Q3 - FY20 Q2. The CCAR results suggest that GS can continue to surprise shareholders positively through capital returns. GS's stressed capital buffer increased 130bps further supporting the firm's ability to pay the dividend and accumulate capital to weather any penalties.
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Dominique DeRubeis Sr Product Analysis and Design Analyst
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
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