Goldman Sachs wins with unexpected Fed ransom authorization

(Bloomberg) – Shares of large banks rose in early trading after creditors, including Goldman Sachs Group Inc. and JPMorgan Chase & Co. said they would take over the Federal Reserve by surprise decision, allowing them to resume share buybacks. Goldman and Morgan Stanley were seen as top winners in their trading profits.

Analysts had expected the central bank to maintain a pandemic-induced bailout. Goldman beat the winners in the S&P 500, up 6.9% to its highest in April 2018, while the broader index drops about 2% amid coronavirus concerns. Morgan Stanley rose up 6% to its highest level since 2007, while JPMorgan, Citigroup Inc., Bank of America Corp. and Capital One Capital One Financial Corp. they were also among the top 10 index winners.

The results of the central bank’s special stress tests for coronaviruses, launched on Friday, showed “a pass for all tested banks and a welcome green light for return on capital,” Susan Roth Katzke, an analyst at Credit Suisse Group AG, wrote in a note. addressed to customers. “The import of the latter – a statement of the strength of the balance sheet and the effectiveness of the existing regulatory framework – cannot be underestimated,” she said.

Along with Goldman and Morgan Stanley, Katzke highlighted BNY Mellon Corp. and State Street Corp. as other likely beneficiaries, while warning that Wells Fargo & Co. they could be “more constrained by the Fed’s limits.” Wells Fargo shares rose 0.2% in mid-morning trading.

The six largest US banks will be able to redeem up to $ 11 billion of their shares next year. The Fed has placed temporary caps on shareholder payments, including repayments, by major banks earlier this year to ensure they have enough capital to cope with a Covid-19-devastated economy.

The KBW Bank Index has been on the sidelines for most of 2020 and is still down 17% for the year, while the S&P 500 has hit new highs, gaining 13%.

Read more: Wall Street is worth $ 11 billion in redemptions with the Fed decision

Here is a sample of the last comment:

Morgan Stanley, Betsy Graseck

Graseck called Goldman “the biggest winner, because four-quarters of his earnings were strong due to trading income.”

It sees redemptions rising in 2021, as Fed rules mean that the total capital distribution – redemptions plus dividends – will be capped at 100% of average quarterly net income over the past four quarters. “As we move into 2021, this final number of four-quarter earnings will increase,” she said, as “massive” loan losses in the first half of 2020 will no longer be part of earnings calculations.

Banks need to outperform as “the vaccine launches, the fiscal stimulus comes and the service economy can take off.” In addition, the Fed could remove the current capital distribution ceiling in the June stress test results.

Citigroup, Jill Shea

Banks have the redemption capacity in the range of 0.3% – 2% of market capitalization, wrote Shea. This is “most significant” for BNY Mellon, State Street, Morgan Stanley and Goldman Sachs.

Goldman Sachs, Richard Ramsden

“We see a substantial ability to buy back shares,” Goldman analyst wrote. He also marked Morgan Stanley, BNY Mellon and State Street as beneficiaries and saw Wells Fargo, PNC Financial Services Group Inc. and American Express Co. as having the lowest capacity.

“We expect most banks to use their full potential redemption capacity, given that they are now confident about the capital return framework for the first quarter and in light of the fact that the framework could change in the coming quarters.” he said.

Atlantic Equities, John Heagerty

“We see the resumption of redemptions as a positive factor for banks,” wrote Heagerty. “The biggest beneficiaries appear to be JPMorgan, Goldman Sachs and Morgan Stanley, which have the strongest trading platforms and therefore delivered net income above expectations in 2020.”

He also sees the return of loan growth in mid-2021, flattening net interest margins and reserve releases.

Keefe Bruyette & Woods, Sanjay Sakhrani

The Fed’s surprise decision is positive for consumer finance firms, Ally Financial Inc., American Express, Discover Financial Services and Synchrony Financial, which are likely to follow colleagues around capital management rules, Sakhrani wrote. Its earnings per share estimates did not incorporate share repurchases until 2022.

Bloomberg Intelligence, Alison Williams and Paul Gulberg

“The Federal Reserve that allows the largest US banks to resume dividends in the first quarter is faster than expected and is a positive regulatory signal. The bank’s broad ability to withstand tougher assumptions than the June tests should also boost confidence, but was to be expected. Much steeper commercial real estate and lost card loss rates are in line with key cycle risks, although they could increase capital requirements for more exposed banks after the 2021 exams, if the assumptions are just as harsh. “

(Updates worldwide for stock trading. Add comments from Bloomberg Intelligence)

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