Stress test discrepancy prompts Bank of America to delay dividend announcement

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Financial institution of America has delayed a dividend announcement after the Federal Reserve’s annual stress take a look at confirmed a big discrepancy between how the regulator and the lender’s personal danger managers predicted it will fare in an excessive downturn.

The Fed predicted that BofA would in reality carry out extra favourably than the financial institution’s personal fashions recommended, shedding much less cash and sustaining the next capital ratio.

Nevertheless, the discrepancy prompted BofA to delay an announcement it had deliberate to make on Friday night detailing its dividend and capital necessities, in accordance with an individual aware of the matter.

The financial institution was anticipated to inform traders it was elevating its dividend however the lack of an announcement was conspicuous by its absence provided that all the different giant US banks up to date traders on their plans on Friday.

“That is odd,” mentioned Gerard Cassidy, a banking analyst at RBC Capital Markets. “It’s not regular.”

The Fed launched the outcomes of its annual financial institution stress exams final week. The exams, which had been put in place after the 2008 monetary disaster, are intently watched by traders as a result of they’re utilized by regulators to find out how a lot capital banks should maintain for the subsequent 12 months.

So long as banks match or exceed the necessities, they’re free from Fed restrictions on how a lot of their earnings they will pay out to shareholders by way of dividends and inventory buybacks.

On Monday, BofA launched an announcement saying it had contacted the Fed to search out out why the regulator’s outcomes had been completely different from its personal. BofA declined to remark additional.

BofA’s inner stress take a look at confirmed it will lose $52bn in a extreme financial downturn and that its capital as a share of whole property would fall at most to eight.3 per cent, the financial institution advised traders on Monday. The Fed, nonetheless, estimated BofA would lose solely $23bn, and that its capital ratio would hunch to 10.6 per cent.

Goldman Sachs additionally outperformed its personal estimates, predicting its capital ratio would fall to a low of 9.5 per cent in a extreme recession in contrast with 10.1 per cent pencilled in by the Fed. The inner stress take a look at outcomes of JPMorgan and Morgan Stanley had been in step with the central financial institution’s estimates. Citigroup and Wells Fargo have but to launch the outcomes of their inner exams.

Scott Siefers, a financial institution analyst at Piper Sandler, mentioned the largest motive for the BofA discrepancy was giant unrealised losses in its bond portfolio, which have jumped on account of rising rates of interest.

This 12 months’s stress take a look at concerned a situation the place rates of interest fell from their latest highs to close zero. The Fed mentioned BofA would e-book a $22bn acquire from the hypothetical drop in charges. BofA, which has maintained that the unrealised losses will not be an issue, mentioned a theoretical drop in charges throughout a recession would have little impact on the worth of its bond portfolio.

If the Fed’s stress take a look at situation had concerned an enormous improve in rates of interest, BofA would have fared considerably worse.

Shares of BofA rose on Monday by 1.8 per cent, in step with rivals. Siefers and different analysts mentioned, regardless of the delay, they nonetheless anticipated that BofA will announce a dividend improve quickly.

“We respect that BAC [BofA] is being clear in its want to know the . . . distinction between its personal take a look at and the Fed’s,” mentioned Seifers in a notice to shoppers. “Backside line, just a little extra uncertainty in BAC’s outcomes than we wish, however hopefully no change to the tip outcome.”