The largest USA banks have passed annual stress tests set by the Federal Reserve, in a testament to the health of the banking system. JPMorgan Chase intends to repurchase $19.4bn-worth of shares over the next year, up from $10.6bn in last year's plan, and plans to increase its quarterly dividend from 50 to 56 cents.
European shares steadied on Thursday as banks extended a winning streak after the U.S. Federal Reserve cleared capital return plans from big banks, off-setting losses among utilities and construction stocks.
The Feds' latest analysis tested the banks to determine if their current plans for paying out capital to shareholders would still allow them to keep lending if hit by another financial crisis and severe recession.
Conversely, embattled bank Wells Fargo somewhat unexpectedly received approval from regulators, despite ongoing financial pressure as a result of the fake account scandal that came to light previous year. Bank of America (BAC) has climbed 2.6% to $24.50 and Wells Fargo (WFC) shares got a 2.3% lift to $55.55.
The Fed found that USA firms' common equity capital ratio has more than double, rising to 12.5 percent at the end of Q1 2017 from 5.5 percent in Q1 2009, a total increase of $750 billion to $1.25 trillion.
After the Fed's announcement, banks began to release details on how they plan to use their extra capital.
"Banking stocks jumped after regulators in the USA gave the green light to higher dividends and buybacks, whilst the hint of a shift in tone from central bankers towards tightening is spurring hopes of higher interest rates again", ETX Capital analyst Neil Wilson said in a note. Bank of America will buy back $12bn in shares, having proposed just $5bn a year ago, and raise its dividend by 60%, to 12 cents.
A senior Fed official said that altogether, banks would be able to pay out 100 per cent of their projected net income over the next four quarters.
Regulators said the firm did not "appropriately take into account the potential impact of the risks in one of its most material businesses".
Harte said he thinks management is making good progress in recovering from last fall's consumer sales scandal, but he said historical precedence typically means such "incidents" result in the rejection of capital return plans.
This year, 13 of the largest and most complex banks were subject to both the quantitative and qualitative assessments.
To offer clarity to the public, the Fed also cited examples of where unnamed banks had stumbled in the past.
Analyst Gerard Cassidy said in a note: "We believe the combination of excess capital and continued earnings growth will enable the industry to give back more capital to shareholders next year than this". Another management team had relied too heavily on experiences during the financial crisis, even though the bank's business and risk profile had changed dramatically since then.
Not every bank passed with flying colours. They, along with Wells Fargo and Morgan Stanley, may collectively buy as much as US$64 billion in stock.