Goldman Sachs and Morgan Stanley told to freeze payouts as rivals prepare for jump in dividends
28/6/2018/Financial Times
Alistair Gray in New York and Barney Jopson in Washington
Deutsche Bank has failed the US Federal Reserve’s latest stress test and Goldman Sachs and Morgan Stanley have been ordered to strengthen their balance sheets by freezing dividends and share buybacks.
Their performances stood in contrast to most other big US banks, which on Thursday unveiled record payouts to shareholders after regulators found their capital buffers were strong enough to withstand another financial crisis.
The Fed gave 22 of the country’s largest listed lenders a green light for about $168bn worth of payouts over the coming year, an increase of more than a fifth from last year, according to RBC Capital Markets calculations.
However, it rejected Deutsche’s plans to transfer cash from the US subsidiary that was tested to its Frankfurt headquarters. Officials cited widespread and critical deficiencies in its capital controls and other “qualitative” weaknesses.
The annual stress test result is the latest blow to the German lender, which has already been placed on the Federal Deposit Insurance Corporation’s list of “ problem banks ”.
In a statement, Deutsche’s US business said it had “made significant investments to improve its capital planning capabilities as well as controls and infrastructure”.
Goldman and Morgan Stanley, meanwhile, were required to rein in their dividend and stock buyback plans after the Fed found their initial proposals left them with inadequate capital buffers.
In the end, Goldman was given the go-ahead to hand out only $6.3bn to shareholders over the next four quarters. That was down more than a third from the $9.9bn that the Fed permitted a year ago, although the bank decided ultimately to distribute only $5.7bn over the period.
The restrictions on payouts for some of Wall Street’s biggest names are a sign of how regulators continue to restrain the sector despite Donald Trump’s election.
An unusually high number of banks had to rethink their original plans for payouts to shareholders. JPMorgan Chase, American Express, KeyCorp and M & T Bank Corporation got the thumbs up only after they submitted more modest plans in the past week. State Street was ordered to improve how it would manage exposures to counterparties in a crisis.
Yet other banks tested got the all-clear for their planned payouts. Wells Fargo is set to top the list of distributors, making a forecast $32.6bn in dividend payments and share buybacks over the coming year, according to RBC.
The result is a welcome break for Wells and pushed its shares up 3.7 per cent in after-hours trading. Investors had feared that the bank, which has been beset by compliance problems, could fail the stress test.
Shares in several other banks also rallied in late trading, giving respite to investors after the S&P 500 Financials index endured 13 consecutive days of declines — its longest losing streak on record.
Citigroup is among several banks that have been given permission to hand back more capital than their annual profits.
Even so, given the disappointing results on Thursday for other banks, the industry’s overall payout ratio — capital distributed as a proportion of earnings — was expected to remain roughly unchanged from last year at about 95 per cent, Fed officials said.
The order for Goldman and Morgan Stanley to keep payouts steady was a form of sanction meted out to banks that fail the stress tests, although the Fed chose not to label Goldman and Morgan Stanley as such.
Fed officials said because of tax cuts the two banks’ test results were weaker than they would have been. Accounting charges caused by the tax reforms had reduced their capital. Randal Quarles, the Fed’s regulatory chief, said this had created “one-time challenges”.
Fed officials noted that the test regime had become stricter this year.
Mr Quarles said the results showed that “the largest banks have strong capital levels, and after making their approved capital distributions, would retain their ability to lend even in a severe recession”.