U.S. Banks’ $75 Billion Payout at Stake in Fed Tests

Wells Fargo, the nation’s largest home lender and the most profitable U.S. bank in 2013, will return as much as $14.7 billion or as little as $13.5 billion, estimates show. ThatPhotographer: Patrick T. Fallon/Bloomberg

The biggest U.S. banks are about to learn whether they can pay out more than $75 billion in excess capital to investors as the Federal Reserve completes stress tests of their ability to survive new economic calamities.

Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) would lead a 69 percent increase in dividends and stock buybacks over the next 12 months after the central bank releases results of its annual tests on March 20 and March 26, according to analysts’ estimates compiled by Bloomberg. That’s assuming the companies pass, which some of the analysts say is less than assured.


"We know the banks have enough capital, that’s not the question,” Todd Hagerman, an analyst at Sterne Agee & Leach Inc. in New York, said in an interview. "It’s more about whether there is something in the capital-planning process that the Federal Reserve might object to.”

Investors and analysts including Hagerman are confident the six biggest firms will pass because of the capital cushions and experience they’ve amassed since stress tests began in 2009. There’s more concern that some of the 12 smaller banks taking part for the first time might not pass and speculation the Fed could reject one or more firms of any size for flawed planning.

"That’s the biggest risk,” said R. Scott Siefers, an analyst at Sandler O’Neill & Partners LP. "The regulators may simply choose to fail one or two guys qualitatively every year.”

Sudden Demise

In addition to the largest commercial lenders, the tests cover the biggest regional banks, securities firms including Goldman Sachs Group Inc. and Morgan Stanley (MS), credit-card issuers such as American Express Co. (AXP) and custodial banks State Street Corp. (STT) and Bank of New York Mellon Corp. The tests of 30 companies are designed to prevent a repeat of the $700 billion bailout program during the 2008 crisis, and the Fed changes the dire economic scenarios that go into the decision each year.

This time, firms must show they can ride out a plunge in the value of high-risk business loans and another housing bust. Eight of the biggest banks also must demonstrate that they can handle the sudden demise of their trading partner with the potential for the greatest losses.

Bankers will have to describe in the "adverse” scenario what would happen to the value of their existing portfolio of riskier commercial loans should yields rise as high as 9.2 percent in the third quarter of 2014. In the Fed’s "severely adverse” scenario, the unemployment rate peaks at 11.25 percent, stocks fall almost 50 percent and U.S. housing prices slide 25 percent, while the euro area sinks into recession.

-By Dakin Campbell and Elizabeth Dexheimer - Bloomberg.com


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