JPMorgan, Goldman to Restart Buybacks as Fed Gives Green Light

TheFederal Reserve, showing confidence in how banks are weathering the pandemic, gave industry leaders a green light to resume billions of dollars in stock buybacks.JPMorgan Chase & Co. andGoldman Sachs Group Inc. said they’ll take the Fed up on its offer.

The loosening of restrictions marks a partial but significant win for firms that have been eagerly awaiting permission to boost capital distributions. JPMorgan and Goldman Sachs plan to resume buybacks in the first quarter, theysaid soon after the Fed’s announcement Friday.

The boost to shareholder payouts is welcome news for an industry that has been largely left out of the stock market rally, even as profit has held up better than many expected when unemployment spiked. The central bank’s relaxed limits came alongside the disclosure that the biggest firms performed well in a second round of 2020 stress tests that assessed how the industry has navigated the Covid-19 tumult.

“Passing was expected; the ability to buy back stock, within limits, was hoped for but not expected,” Susan Katzke, an analyst at Credit Suisse Group AG, said in a note to clients that called the news a “clear positive.”

Based on the new distribution policy, the six biggest U.S. banks could buy back as much as $11 billion of shares in the first quarter of next year, assuming fourth-quarter earnings come in at the levels analysts estimate. That would roughly triple their shareholder payouts.

Shares of the six banks all jumped more than 3% in late New York trading following the Fed’s announcement.

“The banking system has been a source of strength during the past year, and today’s stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,” Fed Vice Chairman for Supervision Randal Quarles said in astatement. The tests showed that none of the largest banks fell beneath their capital minimums under the Fed’s hypothetical stress scenarios.

Even as buybacks resume, dividends will remain unchanged through March, capped at whatever each bank returned in the second quarter of 2020. The Fed said banks’ payouts to shareholders in the first quarter of next year can’t exceed their average quarterly income for 2020.

JPMorgan said Friday that its board has approved up to $30 billion in repurchases, though the timing of utilizing that full amount will be subject to “various considerations.” The Fed’s modified restrictions would likely prevent the bank from reaching that total in 2021, though the regulator could further loosen rules next year.

Fed officials had said their decision on shareholder payouts would be based on the results of the stress tests, which were run because annual exams conducted earlier in the year didn’t capture Covid-19. For the first time, the agency launched a do-over, using new scenarios based on the current turmoil.

JPMorgan and other large U.S. banks had for months indicated they have more than enough capital to weather the crisis and were ready to resume buybacks. But Democratic lawmakers and consumer groups have been urging the Fed to force banks to stockpile capital as long as the economy continues to sputter. Fed Governor Lael Brainard has opposed her agency’s efforts this year to allow limited capital distributions, and she voted against the Fed’s decision to relax the limits further for next year.

“For several large banks, projected losses take capital levels very close to the minimum requirement, in the range where banks tend to pull back from lending, even before payouts,” Brainard said in a statement Friday. “Prudence would call for more modest payouts to preserve lending to households and borrowers during an exceptionally challenging winter.”

The U.S. is undergoing another wave of the illness, with infection rates and death tallies both spiking. But the economy has so far limped along, doing better than many analysts predicted.

In other jurisdictions — including Europe and the U.K. — regulators have begun relaxing the restrictions they’d put in place on bank dividends. Yet those overseers still kept a payout cap well below the level the Fed approved.

The buybacks can bring total payouts to 100% of banks’ average net income over the previous four quarters. The firms already distribute about 30% of their profit through dividends. The 20 U.S.-based banks tested by the Fed could buy back $14 billion of shares in the first quarter, Barclays Plc analysts estimated in a note.

The new limit still could put a cap on banks’ payouts, as they’ve built up capital buffers over the past year and could afford to eat into that excess by distributing more than they earn in coming quarters.

— With assistance by Jennifer Surane

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