Goldman Sachs Group (GS) - Get Report lead U.S. bank shares lower in pre-market trading Friday after the Federal Reserve capped buybacks and dividend payments for the country's biggest lenders following its latest round of stress tests.
The Fed, which has gauged the health of the biggest U.S. banks each year since the global financial crisis, added a so-called 'sensitivity" test to its annual check-up, allowing it to measure the ability of 34 domestic lenders to weather an extreme 'double-dip' recession triggered by the coronavirus pandemic.
Under that "W-shaped" scenario, the Fed said, banks could be on the hook for a collective $700 billion in bad loan losses and a 2.5% fall in aggregate capital ratios.
"In light of these results, the Board took several actions following its stress tests to ensure large banks remain resilient despite the economic uncertainty from the coronavirus event," the Fed said in a statement. "For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans."
Wells Fargo (WFC) - Get Report, which set aside $4 billion in the first quarter to cover bad loans, was marked 2.85% lower in pre-market trading Friday to indicate an opening bell price of $26.59 each. JPMorgan Chase (JPM) - Get Report, the biggest U.S. lender, was marked 1.75% lower at $96.25. JPMorgan's first-quarter loan loss provision was pegged at $8.25 billion, an 87% increase from the same period last year.
Citigroup (C) - Get Report shares were marked 0.57% lower at $52.38 each while Goldman Sachs shares were seen 3.16% lower at $200.55 each. Bank of America (BAC) - Get Report slipped 2.02% to $24.22 each.
"We are impressed by banks’ balance sheet resiliency under the COVID-19 scenarios, and note that these analyses fail to consider the positive impact of economic stimuli," said BMO Capital Markets analyst Lana Chen, who estimates that nearly all of the largest U.S. banks can sustain their current dividend payments into the fourth quarter apart from Goldman Sachs, which she estimates will have a so-called 'stress capital buffer' of 6.7% when the new requirements commence in October.
Goldman's net credit loss provision for the first quarter totaled $937 million, a more than three-fold increase from the prior year, "as a result of continued pressure in the energy sector and the impact of COVID-19 on the broader economic environment."
Goldman paid a $1.25 per share dividend for the first quarter, as part of an overall shareholder return of $2.4 billion, while noting that "given our continued earnings generation and solid capital position, we feel comfortable maintaining our dividend."