Zhicheng Financial App noticed that the Fed will announce its annual stress test results after the close on Wednesday. The test will determine the amount of capital that large banks need to set aside to withstand financial shocks.
The test will calculate the level of Stress Capital Buffer (SCB) for each bank. This in turn shows how much capital they will be allowed to return to shareholders in the form of dividends and share buybacks.
Morgan Stanley analyst Betsy Graseck said in a recent report to clients that for the largest banks (Categories 1-3), the 2024 test is likely to produce an SCB similar to the 2023 test.
This result is expected to encourage GSIBs with significant excess capital to increase their share buybacks. "In GSIBs, we expect a median of 14.8%."
Graseck said: "Following the reintroduction of Basel III in its final stage, buybacks in 2025 are expected to increase by 182% YoY."
She noted that one uncertainty for Category 1 and 2 banks is whether the Fed will change the calculation method for accumulated other comprehensive income (AOCI). She said: "If the Fed's AOCI method is different from last year, it could boost the SCB of banks with significant AFS security portfolios. Citigroup should be least affected as AOCI only has a 30 basis point impact on the bank compared to a median impact of 40 basis points for all Category 1 and 2 banks.
Because the Fed regulates banks in a tiered manner-with stricter regulation for larger banks-not all banks are tested every year. Banks with assets between $100 billion and $250 billion (Category 4) were last tested in 2022.
Graseck said that this year's stress test will be tougher than the one in 2022, which poses an upside risk for this category of banks.
HSBC Bank analyst Saul Martinez believes that $JPMorgan (JPM.US)$ and $Bank of America (BAC.US)$is in a favorable position, even under the revised Basel III endgame rules. As for $Wells Fargo & Co (WFC.US)$, he expects that, even with the potential Basel endgame requirements, an SCB similar to those of previous years also means "considerable excess capital".
He said that this year, Tesla's capital expenditures related to AI will reach $10 billion, about half of which are internal expenses, mainly Tesla-designed AI inference computers, sensors in cars, and Dojo.$Citigroup (C.US)$has a similar SCB level to last year and lower capital flexibility compared to other currency center banks.
Jefferies analyst Ken Usdin pointed out, "AOCI inclusion in CET1 is the biggest burden for regional banks, and we expect this requirement to be retained in the final Basel III rule."
Usdin wrote in a report early June that "given the expected softening of B3 results, the likelihood of a soft landing and weaker loan demand, expectations for buybacks are generally rising."
GSIBs expect higher capital returns, and they bought back stocks in the first quarter and are expected to continue to buy back stocks throughout the year.
Usdin predicts an average dividend payout of around 68% (or about 7% of market capitalization) for the banks studied by Jefferies Financial in 2025, and is particularly bullish on $M&T Bank (MTB.US)$, $Bank of New York Mellon (BK.US)$, $State Street (STT.US)$And$Wells Fargo & Co (WFC.US)$.
Editor/Somer