By Telis Demos 

The Federal Reserve has finally started to lift the lockdown on bank buybacks, but not by so much that investors should be making big new holiday plans.

Following the results of another stress test, the Fed's dividend restriction continues, capping them where they were in the second quarter and limiting them based on recent income. As for the banks that have cut dividends, it is a mixed bag. Based on FactSet's fourth-quarter consensus earnings estimates, Capital One Financial may have capacity to restore its prior dividend; for Wells Fargo, it is less clear.

Attention will now turn to buybacks, which the Fed will allow starting in the first quarter. However, dividends and buybacks together aren't to exceed banks' average quarterly income over the preceding four quarters. For shareholders, this is quite good but not yet amazing news.

The new allowance likely won't be big enough to absorb too much of banks' capital that is in excess of their minimums. The six biggest U.S. banks now have common equity Tier 1 capital ratios that are on average more than 2 percentage points above the requirements set by the June stress test. Importantly, the Fed didn't for now recalibrate those minimums based on the latest test results.

Judging from analysts' fourth-quarter earnings estimates and likely dividends, it is unclear that the other biggest banks -- Bank of America, Citigroup and JPMorgan Chase -- will quite be able to immediately resume their pre-pandemic quarterly pace of buybacks in the first quarter. Goldman Sachs and Morgan Stanley look likelier to be able to do something approximating their prior pace right away. But it all greatly depends on actual fourth-quarter results.

Meanwhile, banks' capital cushions may grow even bigger next year. A combination of good credit performance spurring reserve releases and tepid loan growth is generally a formula for bumping up capital ratios. That, in turn, means return on equity could lag behind profit growth.

The Fed may decide to unbridle the banks later next year, though its deliberate pace so far suggests that is hardly a sure thing. So for now, banks will remain in the position of having a lot of capital to potentially return.

Write to Telis Demos at telis.demos@wsj.com

 

(END) Dow Jones Newswires

December 21, 2020 06:14 ET (11:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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