Analysts expect the largest redemption in the second half of 2021 as a percentage of market value among large banks at Capital One Financial.
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Sarah Blesener / Bloomberg News
It is approaching business as usual for the largest banks in the US when it comes to shareholder payments.
The Federal Reserve is to put an end to the special restrictions implemented during the pandemic on the ability of most large banks to buy shares and pay dividends from June 30, depending on the results of annual stress tests. Banks will have to delete the minimum capital levels established by that exam. Normally, under the Fed’s stress testing regime, banks that do not meet their requirements have the ability to adjust their balance sheets and face restrictions that increase to below their minimums. However, for the time being, a bank that does not meet the minimum stress test remains subject to the current restrictions, which limit redemptions based on the next net income, for an additional quarter before the start of the regular regime.
This decision comes after the Fed did something that, in theory, could prevent bank payments, which was to let the exemption expire for Treasuries and central bank reserves in measures on how much leverage banks are. This means that large banks are now approaching their leverage limits. However, crucially, the Fed’s stress capital amortization regime does not include a stressed leverage component. Therefore, this potential limitation may not take into account payment restrictions at this time.
Assuming that this year’s stress test is not dramatically stricter than in recent years, a significant chunk of cash must be unlocked. Goldman Sachs Group analysts estimate that the largest banks have the capacity under current rules, before the June 30 easing, to buy shares worth about $ 22 billion in the second quarter. Once the rules are relaxed, he estimates that repurchases could nearly triple in the second half of the year to $ 63 billion, or about 3 percent of the market value of these banks. Consumer lenders that have returned strongly so far could have some of the biggest potential: Goldman analysts expect the biggest buyback in the second half of 2021 as a percentage of the market value of large banks from Capital One Financial.
MEMORY 1.35%
The degree to which banks use this capacity is the next question. In theory, under the stress capital depreciation regime, which began last year but was not really used because of the pandemic, redemptions could come at a faster pace than in the past. However, if lending returns sharply, risk-weighted assets will grow much faster than they did, with banks buying mainly government bonds, which could put pressure on capital rates. The rapid rise in the book-price ratio for banking stocks could also discourage redemptions.
But the bottom line is that investors may start thinking about bank payments, as they did before the pandemic. That alone should be good for the banks.
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It appeared in the March 27, 2021 print edition, “Payday Is Nearly Here For Bank Investors.”