The Annual American Bank Test & Adjustment in Cash Dividends

Annually, U.S. banking regulators (the Federal Reserve Bank, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) perform a bank stress test.

This bank stress test assesses the resilience of large banks under hypothetical two-year recession scenarios. These scenarios are not predictions. For this year, 32 banks will face a severe global recession affecting real estate and corporate debt markets. The results are expected to be published this week.

In the 2024 test, the U.S. unemployment rate peaks at 10 per cent, with severe market volatility, wider corporate bond spreads, and a collapse in asset prices, including a 36 per cent drop in house prices and a 40 per cent drop in commercial real estate prices. Large banks must also consider a counterparty default scenario. Additionally, banks with significant trading operations will face a global market shock component, stressing their trading positions with hypothetical market distress and heightened uncertainty.

Here’s an infographic from the Federal Reserve explaining how the test works:

It’s worth noting that as a result of these tests, the banks participating could also announce adjustments to the capital distribution to shareholders via cash dividends and share buybacks. Among the 23 banks that took part last year, Wells Fargo, Goldman Sachs, Morgan Stanley, JPMorgan, and Citigroup adjusted their dividend and share buyback plans after the 2023 test results.

• Morgan Stanley's shares are up 13% in the past year, and it increased its quarterly dividend by nearly 10%, continuing its annual increases.
• Citigroup, with shares up 28%, announced a nearly 4% dividend increase and is likely to raise it again in August after the next test.
• JPMorgan's shares rose 40%, with a 5% dividend increase after the test and an additional 10% increase earlier this year.
• Goldman Sachs shares are up 40%, with a 10% dividend increase post-test.
• Wells Fargo shares rose 41%, with a nearly 17% dividend increase after the test.

Based on their historical quarterly payouts, Morgan Stanley is expected to pay the next quarterly cash dividend in August (The last date to trade ‘LDT’ in July).  Citigroup in August (both payment and LDT date), JPMorgan in July (both payment and LDT date), Goldman Sachs and Wells Fargo in September (payment date) and August (LDT date).

Previously, these banks managed to boost their cash dividends to shareholders after stress tests indicated lighter capital requirements. The stress tests showed that the banks would lose $541 billion in a doomsday scenario but still have sufficient capital, allowing them to update investors on higher dividend plans and providing a respite amid impending stricter capital standards.

Past performance does not guarantee future results; the upcoming 2024 results (set to be published on 26 June 2024) could also result in an adjustment in upcoming dividends and share buybacks, depending on the capital requirements. Additionally, the results could give investors an idea of how the banks could perform amid actual events where the economic environment is similar to or close to what was part of the stress test.

In the intricate world of finance, money is the lifeblood that fuels economies, shapes markets, and drives innovation. Yet, how much do we truly understand the journey of money from its inception to its role in our daily lives?

The year 2024 is poised to become a landmark moment in history, with over 2 billion people worldwide preparing to cast their votes in elections spanning countries like the US, India, the European Union, Mexico, and South Africa, as highlighted by the World Economic Forum.

As countries return to work to ensure food security while working on the energy transition: there are potential opportunities in the electric vehicle (EV), energy supply, and fertilizer sectors.