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Bank of America has postponed its dividend announcement after the Federal Reserve’s annual stress test found a wide divergence in forecasts between regulators and lenders’ own risk managers.
The Fed predicted that BofA would actually perform more favorably than the bank’s own models suggested, lose less and maintain higher capital ratios.
But the discrepancy has forced BofA to postpone announcing details of its dividend and capital requirements, which were scheduled for Friday night, according to a person familiar with the matter.
The bank was expected to tell investors it would raise its dividend, but the lack of an announcement was conspicuous given that other big U.S. banks had updated their plans to investors on Friday.
“This is strange,” said Gerald Cassidy, a banking analyst at RBC Capital Markets. “It’s not normal.”
The Fed released the results of its annual bank stress test last week. The test was introduced after the 2008 financial crisis and has drawn investor attention because it is used by regulators to determine how much capital banks must hold over the next 12 months. ing.
As long as banks meet or exceed the requirements, they are not subject to Fed restrictions on how much of their earnings can be paid out to shareholders through dividends or share buybacks.
BofA issued a statement on Monday that it had contacted the central bank to investigate why the regulator’s results differed from its own.
BofA declined to comment further.
The bank told investors on Monday that its internal stress test showed that a severe economic downturn would result in a loss of $52 billion and reduce equity as a percentage of total assets to as much as 8.3%. said. But the Fed estimated that BofA would only lose $23 billion, lowering its capital adequacy ratio to 10.6%.
Goldman Sachs also beat its own estimates, forecasting a capital ratio of 9.5%, a low in a deep recession, from the 10.1% set by the Fed. JP Morgan and Morgan Stanley’s internal stress test results were in line with central bank expectations.
The Fed expected Citigroup’s capital adequacy ratio to drop to 9.1%, worse than the bank’s own 10.6% forecast. Citi said on Friday it was disappointed with the stress test results but had increased its dividend anyway. Citi said Monday it has also asked the Fed for more information about the test results. Wells Fargo has not yet released the results of its internal testing.
Scott Schiefers, a banking analyst at Piper Sandler, said the biggest reason for the BofA’s divergence was the large unrealized losses in its bond portfolio, which was inflated by rising interest rates.
This year’s stress test included a scenario in which interest rates fall from recent highs to near zero. The Fed said BofA would book a profit of $22 billion if interest rates fell. BofA maintains its position that unrealized losses are fine, saying a theoretical drop in interest rates during a recession would have little effect on the value of bond portfolios.
Had the Fed’s stress test scenario included a significant interest rate hike, BofA’s performance would have been significantly worse.
BofA shares rose 1.8% on Monday, in line with its competitors. Schiefers and other analysts said they still expected the company to announce a dividend increase soon despite the delay.
“We appreciate BofA’s transparency in its desire to understand the … the difference between its own testing and the Fed’s,” Schiefers said in a note to clients. rice field. “In conclusion, the BofA results are slightly more uncertain than we would like, but we hope the final results remain the same.”
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