Fed lifts restrictions by allowing large banks to buy back shares

The Fed conducted the second stress test for large US banks this year, – the results showed that banks weathered the pandemic crisis better than expected. Given the high level of capitalization of banks, the Fed has allowed them to renew their capital return programs, which will lead to share buybacks and a potential increase in dividends in 2021.

Shares of major US banks received a positive signal for growth in the coming year 2021.

On Friday, the Federal Reserve System (FRS) conducted stress tests on large US banks to test their ability to withstand high credit losses for the foreseeable future. This is the second stress test for banks this year, after the Fed demanded that banks stop buybacks in the market of their own shares amid the height of the pandemic and limited dividend payments based on recent earnings.

The results of this audit last week showed that all large and most small banks are well capitalized. As a result, the Fed allowed large banks to resume their capital return programs in the first quarter of 2021, provided that dividends and share repurchases are capped at an amount based on last year’s earnings.

Thus, the six largest US banks will be able to buy back their shares worth up to $ 11 billion next year.

Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) were all higher on Monday but closed lower on Tuesday due to a general market decline amid concerns about a new strain of coronavirus. Government economic data was also disappointing, suggesting that more efforts will be needed to pull the US out of the recession.

What awaits US banks in 2021?

2020 was a difficult year for banks, which needed to build large capital reserves to cover potential loan defaults. The Fed’s zero interest rates limited yields, and the stock buyback ban prevented banks from buying their own shares while they were very cheap.

On the one hand, the negative impact of the weak economy and zero rates, which the Fed has promised to hold until 2023, will continue to affect the profitability and profits of banks.

On the other hand, the Fed’s permission for large banks to resume their capital return programs will lead to buybacks and a potential increase in dividends in 2021.

Banks have already begun to announce the resumption of buyback programs.

Morgan Stanley, for example, announced a new $ 10 billion buyback program. JPMorgan Chase plans to buy back $ 30 billion in shares next year, which is about 10% of its bank’s market capitalization. This could make a big difference next year and should lead to higher earnings per share, all other things being equal. Plus, owning JPMorgan shares offers a solid 3% dividend yield. According to analysts’ forecasts, JPMorgan will receive $ 10.60 in earnings per share in 2022.

Market analysts point out that earnings and profits of the largest US banks have been less hit by the pandemic crisis than expected, and the decline in share prices this year may have been excessive.

Over the past two quarters, banks such as Morgan Stanley, Goldman Sachs, JPMorgan and Citigroup have surpassed their earnings and earnings per share forecasts.

The top performers were Goldman and Morgan Stanley, thanks to their strong investment units, which generated high profits from volatile trading in the financial markets.

Analysts say many bank stocks still look cheap despite strong gains over the past couple of months. An increase in the buybacks by these well-capitalized companies could lead to earnings per share outperforming current estimates.

Morgan Stanley analyst Betsy Gracek said the banks will perform better as “large-scale vaccinations unfold, fiscal stimulus is implemented and the economy can potentially grow.”

Experts also expect a resumption of credit growth in mid-2021, an increase in net interest margins and the release of bank reserve funds.

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