It’s that time of year again: Next week, Bank of America and other large U.S. banks will begin learning results of their latest “stress tests” – federal exams meant to see how the firms would fare in another recession.
The tests, which are conducted annually by the Federal Reserve, are a big deal for banks. The regulator is looking to see whether banks have enough capital to absorb losses and continue operating during a downturn. A fumble could result in the Fed objecting to a bank’s plans to increase its dividend or return capital to shareholders in other ways.
Bank of America investors, especially, will be watching with interest. The Charlotte-based bank continues to pay a common-stock dividend of 5 cents a quarter, well below the 38 cents paid by Wells Fargo and the 48 cents paid by JPMorgan Chase.
The Wells and JPMorgan dividends are back to pre-recession levels, while Bank of America’s remains below the 64 cents it paid as recently as 2008. Citigroup, meanwhile, is paying a 5-cent dividend, below the 32 cents it paid in 2008.
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At Bank of America, some longtime shareholders whose investment goes back to predecessor NationsBank, if not further, remain frustrated the dividend is not higher. But it’s unclear whether Bank of America will ask the Fed for a higher dividend as part of its latest round of stress tests. Bank of America normally does not publicly disclose such plans.
The stress tests are divided into two parts. On June 23, the Fed will tell the banks how it thinks their capital would hold up in a hypothetical recession. On June 29, the regulator will tell them whether their dividend plans got the go-ahead.
Some analysts are expecting Bank of America investors to be among the big winners of the latest round of stress tests. Bank of America, Citigroup and BB&T could see the biggest increases in capital returns, according to a report by Sanford C. Bernstein analysts. Distributing more capital is crucial for Bank of America and Citigroup to re-establish their positions as “quality” stocks, the report states.
Pressure is also on Bank of America CEO Brian Moynihan to improve the bank’s performance on the tests. Bank of America has stumbled on the exams in three of the past five years, more than any other big U.S. bank.
Last year, Bank of America had to resubmit its test after the Fed found “deficiencies” and “weaknesses” in the bank’s capital planning process. The bank addressed those issues and later won approval from the Fed for its resubmitted test.
Responsibility for the bank’s test submission this year falls to Charlotte-based Andrea Smith, named chief administrative officer last year by Moynihan.
In a CNBC interview last month, Moynihan predicted the bank will clear the stress test, as well as a rewrite of its “living will.” Federal regulators require large banks to write the wills to show how they would be dismantled in a failure without relying on taxpayer bailouts. Regulators last month told Bank of America and a handful of other banks to fix problems in their wills by Oct. 1.
“We think we’ll pass them both,” Moynihan said.