The nation's 25 largest banks are preparing to boost their payouts to shareholders by 25 percent, or $30 billion this year, a Bloomberg analysis found, in spite of upcoming stress tests from the Federal Reserve. The annual tests, which assess how well banks can withstand economic pressures in hopes of preventing another financial crisis, have forced banks to limit their dividends and hold on to profits in years past.
"With more profits and softer regulation on capital restrictions, banks are free to return more capital to shareholders," Carter Henderson, Chief Investment Officer at Henderson Capital Group said. "Good news for the shareholders is that instead of the banks holding this extra money in their reserves, they will now return more to shareholders in the way of dividend increases and share repurchases."
This will not be the first time banks spread their wealth after successful stress tests. Citigroup doubled their dividend and initiated a $15.6 billion buyback and Bank of America raised their dividend 60% in addition to a $12 billion buyback after passing their stress tests last year. The Fed will release the names of the institutions that did not pass this year's test on June 21.
Good stress tests aren't the only thing driving up dividends, however. President Trump's revision of the Volcker Rule and the Fed's interest rate hike have both widened banks' profit margins.
"Essentially, the relationship is that higher interest rates make banks more profitable," Robert Johnson of the Fed Policy Investment Research Group said. "The reason is that their lending margins - the interest they receive on their loans less the costs of the funds they acquire - widens as rates rise. This relationship is particularly strong when interest rates have been very low, as they have since the financial crisis."
Shareholders shouldn't expect to see all of the payouts reach their pockets, according to Henderson.
"Dividends are a tangible way that companies can add value for shareholders - the shareholders actually get more money," Henderson said. "The share repurchases, although they usually increase the stock price which adds value - they are really just a way of financial engineering and making the company's earnings per share look better because there are less shares outstanding. It doesn't add true value to the firm."
Bank of America and Citigroup declined to comment.