Skip to Content
Stock Analyst Update

Bank Stress Tests 2021: A Return To Share Repurchases

As all banks 'passed,' we expect sizable share repurchases to be forth coming, and dividend hikes are also on the table.

Mentioned: , , , , ,

We had been expecting the banks to perform well on this latest round of stress tests, as the sector has built up excess capital and reserves and had already done well on multiple rounds of tests last year. Things generally went as expected, as all banks “passed” the tests, and calculated stress capital buffers, or SCBs, are generally coming out about where we were expecting them. As a result, we expect sizable share repurchases to be forth coming, and dividend hikes are also on the table. We calculate that most banks are carrying roughly a midsingle percentage of market cap in excess capital, with Wells Fargo (WFC) and Capital One (COF) being the big standouts, carrying over 10% in excess each. We also expect dividend hikes to occur, but to be modest, likely in the low to mid-single-digit percentage growth range.

As a reminder, the U.S. Federal Reserve is keeping its current buyback and dividend restrictions in place through June 30, but starting in July we expect the capital return flood gates to reopen. The Fed is also putting a moratorium on releases related to planned capital actions and SCB requirements from the banks until Monday, June 28. Because banks are now using the SCB framework, the types of capital return announcements could differ from past years and could be more vague, as banks aren’t seeking approval for specific plans but are instead allowed freedom in their capital returns as long as capital levels stay at appropriate levels. We’ll know more starting on Monday.

 

Only 19 banks were required to participate this year, compared to 33 from 2020, as many banks are only required to participate every other year. Four banks that could have sat out this year still elected to participate. These banks were Regions (RF), BMO (BMO), MUFG (MUFG), and RBC (RBC), bringing the total number of participants to 23. 

 

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.