A group of KBW analysts said that when the Federal Reserve releases its stress-test results on Thursday, it may raise the stress capital buffers for Truist Financial Corp. and KeyCorp and lower them for Goldman Sachs Group Inc., Citigroup Inc., and other large banks.
The Fed uses the stress tests to help figure out stress capital buffers, which are an important part of a bank’s balance sheet that protects it from system shocks.
For bank shareholders, the Fed’s annual stress tests are important because they often have an effect on stock buybacks and dividends, both of which raise the value of shares.
David Konrad, an analyst at KBW, said that KeyCorp’s KEY, -0.84% preprovision net revenue will be impacted by low-yield swaps and securities on its balance sheet. However, the bank’s credit losses should remain stable.
Researchers at KBW think that KeyCorp’s stress capital buffer is 3.4% of its balance sheet. However, that amount should go down by the test in 2025 as the bank revalues the securities on its balance sheet. KBW doesn’t think KeyCorp will buy back any of its own stock until 2025.
According to KBW, Truist Financial TFC, -0.89% will need to raise its stress capital buffers by 0.6% to 3.5% as its pre-provision net revenue falls. KBW thinks that Truist’s 3.5% capital buffer will go down over the next year as the bank restructures its debt.
Truist has extra cash from selling its Truist Insurance Holdings unit, so Konrad from KBW doesn’t think the test will have a big effect on the company’s plans to buy back its own stock starting in the second half of 2024.
KBW said that Truist and KeyCorp may need more capital, but they also offer the highest dividend yields of about 6%.
KBW predicts that Citigroup Inc.’s stress capital buffers will drop by 0.4% to 3.9%, which is a drop of 1.380%.
Analysts say that Citi has sold most of its international consumer loans and its credit card business in the United States has grown.
Because Goldman Sachs Group Inc. GS, -0.59% has less exposure to stocks and real estate, its stress capital buffer requirement is likely to drop by 0.6% to 4.9%.
After lowering its exposure to commercial real estate, M&T Bank Corp.’s stress capital buffer is expected to drop by 0.5% to 3.5%, according to KBW. Huntington Bancshares Inc.’s stress capital buffer is also expected to drop by 0.5% to 2.7%.
Analysts said that M&T Bank, Charles Schwab Corp. SCHW, -0.31%, and Bank of America Corp. BAC, -0.99% have “the largest positive for buyback assumptions” compared to what Wall Street thinks will happen over the next four quarters. On the other hand, they think that Bank of New York Mellon Corp. BK, -0.61%, Morgan Stanley MS, -1.36%, M&T Bank, and State Street Corp. STT, -0.26% will have the highest dividend-payout ratios.
The Federal Reserve released its 2024 stress-test scenarios in February. These scenarios compare the financial strength of banks to a “severe global recession,” “heightened stress” in both residential and commercial real estate, and chaos in the corporate debt markets.
There will be a 10% unemployment rate in the U.S. by the third quarter of 2025, and home prices will drop 36% and commercial real estate prices will drop 40%.
Banks often figure out how much money is left over for split payouts and stock buybacks by seeing how much regulators put into their minimum stress capital buffers after the test.
A definition from the Federal Reserve says that the stress test checks to see if banks have enough capital to handle losses during tough times while still meeting their obligations to creditors and counterparties and continuing to lend to people and businesses.
It has been two years since Michael Barr became head of supervision at the Federal Reserve. The stress tests are a way to mark that time.
The results of the 2024 stress test will be made public on Wednesday afternoon.
