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US banking giants are poised to return $80bn to shareholders after 2022’s Federal Reserve stress tests, less than 2021’s elevated level that followed a pandemic-driven buyback pause. 

JPMorgan Chase is set to lead the group with $18.9bn in combined dividends and share buybacks, even as the biggest US lender spends more in 2022 to build out offerings and fend off competition. Bank of America and Wells Fargo are expected to return $15.5bn and $15.3bn, respectively, according to data compiled by Bloomberg based on estimates provided by analysts at Barclays. 

“Because the banks didn’t buy back stock during Covid, the last year was very elevated, so you reduced that excess capital,” Jason Goldberg, an analyst at Barclays, said. “We’re certainly in a period of increased economic uncertainty, and at the same time we’re actually seeing pretty good loan-growth opportunities.”

The annual exams force banks to consider a hypothetical crisis and estimate the losses they might face based on their books of business. The banks use those numbers to assess how much capital they can afford to dole out to investors. The results of the 2022 tests will be released on Thursday, while banks will unveil their capital plans in the coming weeks.

In 2021, dividend payouts by the nation’s six largest lenders rose by almost half after the country’s largest banks amassed mountains of excess cash during the pandemic. Morgan Stanley alone doubled its quarterly payout while also announcing as much as $12bn in stock buybacks.

That makes for a tough comparison in 2022. Banks are also dealing with fears that historic levels of inflation and central banks’ efforts to tame it will limit economic growth. That has been compounded by Russia’s invasion of Ukraine, which has sparked geopolitical uncertainty across the globe. 

“Going forward this year, like many of our peers, we do expect to have a moderated share buyback programme due to the uncertainties of the macro environment,” Citigroup CEO Jane Fraser told investors in April. 

The Fed’s “severely adverse scenario” in 2022 includes “a severe global recession accompanied by a period of heightened stress in commercial real estate and corporate debt markets”, according to the Fed’s website. In a sign of the pandemic’s effect, the hypothetical downturn “is amplified by the prolonged continuation of remote work, which leads to larger commercial real estate price declines that, in turn, spill over to the corporate sector and affect investor sentiment”.

The scenario features a peak US unemployment rate of 10%, a real GDP decline of 3.5% from the end of 2021 and a 55% drop in equity prices. It also incorporates a sharp decline in inflation to an annual rate of 1.25% in the third quarter of 2022 on higher unemployment and lower demand.

Historically, these exams would prompt frustration and anxiety across Wall Street and the Fed would ultimately have to sign off on lenders’ capital plans. Now, the vast majority of banks pass after having become more familiar with the exercises and no longer need Fed approval as long as they stay above their established capital minimums.

“There may be more stress, but there ought to be ample excess capital to render this manageable, broadly and in the context of our expected payouts,” Credit Suisse analyst Susan Katzke wrote in a note to clients, adding that incremental stress is being driven by balance sheet growth and less money set aside for soured loans compared to 2021. 

Bloomberg News
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