U.S. Bank Shares Climb on Promise of $11 Billion Buyback Bonanza

Shares of the biggest U.S. banks rallied after the Federal Reserve said it would let stock buybacks resume as soon as next month, with as much as $11 billion headed to shareholders.

Goldman Sachs Group Inc. rose 6.1% at 9:47 a.m. in New York, while Morgan Stanley gained 5.3% and JPMorgan Chase & Co. added 3.8%. The industry bucked the broader market, which fell on concern about a new variant of the coronavirus emerging in the U.K.

Results from the central bank’s special coronavirus stress tests, released on Friday, showed “a pass for all of the tested banks and a welcomed green light for capital returns,” Susan Roth Katzke, an analyst at Credit Suisse Group AG, wrote in a note to clients. She called the buyback approval “an affirmation of balance-sheet strength and the efficacy of the existing regulatory framework.”

Policy makers found that Wall Street navigated the Covid-19 turbulence well, and has adequate capital to weather an extended economic downturn caused by the virus. In June, the Fed put temporary caps on shareholder payouts by the biggest banks, prohibiting them from buying back their own stocks or increasing dividend payments.

JPMorgan and Morgan Stanley said they plan to resume buybacks starting next quarter. Citigroup Inc. and Goldman Sachs said they also intend to resume purchases next year, while Bank of America Corp. Chief Executive Officer Brian Moynihan has said the firm plans to buy back stock “as soon as we’re allowed to.”

Based on the new distribution policy, the six biggest U.S. banks could buy back as much as $11 billion of shares in the first quarter, assuming fourth-quarter earnings come in at the levels analysts estimate. That would roughly triple their shareholder payouts.

U.S. Bank Shares Climb on Promise of $11 Billion Buyback Bonanza

Wall Street banks have been largely on the sidelines during this year’s stock market rally, hard-hit by the pandemic-induced economic slump and persistently low interest rates as they’ve eagerly awaited permission to boost capital distributions.

Even as buybacks resume, dividends will remain unchanged through March, capped at whatever each bank returned in this year’s second quarter. The Fed said banks’ payouts to shareholders in the first quarter of next year can’t exceed their average quarterly income for 2020.

The banks currently distribute about 30% of their profit to shareholders through dividends. The buybacks can bring total payouts to 100% of banks’ average net income over the previous four quarters.

Fed Vice Chairman for Supervision Randal Quarles said the banking system has been “a source of strength during the past year,” adding that the second round of stress tests “confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy.” None of the largest banks fell beneath their capital minimums under the Fed test’s hypothetical scenarios.

Democratic lawmakers and consumer groups have been urging the Fed to force banks to stockpile capital as long as the economy continues to sputter. Fed Governor Lael Brainard, who voted against the decision, said: “Prudence would call for more modest payouts to preserve lending to households and borrowers during an exceptionally challenging winter.”

Morgan Stanley analyst Betsy Graseck called Goldman the “biggest winner,” saying the firm’s recent earnings have been bolstered by strong trading revenue. Buybacks will probably increase throughout 2021 as the Fed’s formula means bank’s large loan losses booked in the first half of 2020 will no longer be part of earnings calculations.

©2020 Bloomberg L.P.

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