Destress Tests

Image source: Trinet Uzun, NelsonHache - Shutterstock

What's going on?

A group of US banks announced plans this week to return even more cash to shareholders in 2022.

What does this mean?

Every year, the Federal Reserve (the Fed) implements a stress test on US banks to make sure they have enough money to deal with an economic meltdown and its potential consequences. This year’s test, for example, imagined that US unemployment hit 10%, the stock market fell by 55%, and the economy shrank by 3.5% from the end of last year. Banks then use the results of that test to work out how much they can afford to give to investors in the form of share buybacks and dividends.

Quite a lot, it turns out. All of the lenders passed the test with flying colors, which encouraged a selection of them to up their payouts. In fact, analysts now think US banks will return as much as $80 billion to shareholders this year (tweet this).

Why should I care?

The bigger picture: This is getting too real.
Some banks seem more cautious about the state of the economy, with the likes of JPMorgan and Citigroup keeping payouts as they are. And it might be a smart move when you consider that the terms of the test were announced in February, before US inflation hit a 40-year high and the Fed started hiking interest rates. These scenarios, then, suddenly seem less like the extreme end of the spectrum and more like a plausible vision of the future.

Zooming out: Try harder, Goldman.
Goldman Sachs is one of the banks that boosted payouts, but it has more to do to get investors on side: the firm projected this week that its fledgling consumer business will lose $1.2 billion this year. That matters because analysts only expect investors to give Goldman’s stock a higher valuation if it builds out a more diversified business – one that can handle any slowdowns in its core trading and banking businesses.

Originally posted as part of the Finimize daily email.

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