Wells Fargo & Co. announced it will buy back up to $24.5 billion of stock and boost its quarterly dividend after the Federal Reserve said the bank was among those that passed its stress tests.
The Fed’s toughened stress tests, whose results were announced Thursday, forced six U.S. banks including JPMorgan Chase & Co. to scale back proposals for doling out more cash to shareholders. Two — Goldman Sachs Group Inc. and Morgan Stanley — agreed to freeze total payouts at previous years’ levels.
American Express Co., M&T Bank Corp. and KeyCorp also had to temper initial requests to distribute cash, according to results posted Thursday. Twenty-eight other firms, including Wells Fargo, can proceed with their original proposals to boost stock buybacks and dividends after the Fed found they’d still hold enough capital to weather a hypothetical economic shock.
The regulator failed a U.S. subsidiary of Deutsche Bank, citing “widespread and critical deficiencies” in its planning, limiting the unit’s ability to send capital home to Germany.
Big banks may still be able to deliver the $170 billion in combined payouts that Wall Street analysts had predicted for the coming 12 months — about $30 billion more than in the previous four quarters. On average, firms will distribute about 95% of their profits, the Fed said; that’s in line with analysts’ estimates.
Bank investors expect institutions to distribute profits, which otherwise remain on the books as capital — the cushion that helps banks absorb losses when loans go bad.
Too much capital can make a bank less profitable; too little can make it more likely a bank will fail in the event of a downturn, hence the Fed’s restriction on bigger dividends and buybacks for institutions that fail stress tests.
And not every hiccup was a major surprise: Though JPMorgan was expected to dramatically boost distributions, several analysts predicted that Morgan Stanley would increase its payout only slightly and that Goldman Sachs would return less cash. In the end, Morgan Stanley and Goldman pledged to keep their payouts at the previous years’ level, according to the Fed. JPMorgan said it will boost its quarterly dividend by 43% and buy back as much as $20.7 billion in shares.
Many banks subject to the test began disclosing their plans after results were posted. AmEx said it will buy back as much as $3.4 billion and increase its dividend 11%. In addition to the hefty buybacks Wells Fargo announced, the San Francisco bank said it will boost its quarterly dividend by 4 cents a share, to 43 cents from 39 cents.
In February, the Fed ordered Wells Fargo to stop growing until it could fix a bevy of risk-management and oversight problems that led to the creation of unauthorized accounts and other consumer abuses. But the Fed did not say Wells Fargo was over-leveraged.