NEW YORK: US investors expect banks and other financial institutions to announce large returns of capital to shareholders after the Federal Reserve publishes the first set of results from its annual “stress test” late on Thursday.
Even so, gains in financial shares may be muted.
Many of the 38 financial firms undergoing the test are expected to boost dividends and share buybacks due to higher profits on the back of tax cuts and rising net interest income.
Banks will be able to unveil capital return plans for the coming year next week after the Fed issues its second set of results that determine how much of a capital buffer the banks need.
The Fed examines the health of the balance sheets of the biggest financial firms every year to ensure that they have enough capital to withstand a shock to the system in the wake of the 2007-09 financial crisis.
“General headlines will be constructive with the vast majority of banks increasing their dividends and buying back more stock,” said Jason Goldberg, a bank analyst at Barclays.
Goldberg estimates that the 22 banks he covers should be able to announce returns of 103 per cent of earnings compared with an estimated 86 per cent for the year that ends in June.
Celebrations may be somewhat overshadowed however by loan growth data and a flattening yield curve, according to Sameer Samana, global equity and technical strategist at Wells Fargo Investment Institute in St.
Louis.
“(Stress test results) could be a catalyst for a day or two but it’ll still come back to the main driver which is going to be the yield curve and loan growth, which has been OK but nothing to write home about,” said Samana.
Bank profits are boosted by a steepening yield curve, when the gap is widening between short-dated treasury yields and long-dated treasury yields.
Banks profit from the difference between short-term rates, which determine their borrowing costs, and long-term rates, which affect how much they can charge for loans such as mortgages.
The spread between US Treasuries 2-year and 10-year yields has not been this narrow in a flattening process since 2005.
On June 29 last year, after banks released their capital plans following the stress test, the S&P 500 bank index.
SPXBK ended the day 1.8 per cent higher. — Reuters
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