Goldman Sachs can meet additional capital demands from the Federal Reserve without changing its strategy, the Wall Street bank said on Monday night, as Wells Fargo confirmed it would have to cut its dividend because of new Fed restrictions.
Goldman is the only large bank that was left with a capital shortfall after the Fed last week gave banks indicative requirements for the “stress capital buffer” which they must meet by October 1. Wells is the only big bank that will have to cut its dividend to meet a temporary Fed rule capping dividends at recent earnings.
Both US banks have suffered share price falls of more than 6 per cent since the Fed announced the results of its annual stress tests and capital review on Thursday night last week.
The new capital buffer, which will be finalised by August 31, is tailored to the risk profile of individual banks based on the results of last weeks’ bank stress tests and is designed to ensure they have a cushion if the economy or financial markets worsen sharply.
JPMorgan Chase, Citigroup, Morgan Stanley and Bank of America all confirmed that their new capital requirements were lower than their existing capital levels, and said they would maintain current dividend payments.
In Goldman’s case, a stress capital buffer of 6.7 per cent pushed its total capital requirements to a common equity tier one, or CET1, ratio of 13.7 per cent, implying it held $13.70 of high quality capital for every $100 of risk-weighted assets.
Goldman’s CET1 ratio stood at just 12.5 per cent at the end of March. David Solomon, the banks’ chief executive, said on Monday that the ratio had already risen closer to the new requirements.
“We have a track record of rebuilding capital when necessary, and have brought our standardised CET1 ratio above 13 per cent as this quarter comes to a close,” Mr Solomon said. “We fully intend to continue this dynamic capital management while helping our clients continue to navigate challenging markets.”
In a statement, Goldman said it remained committed to the “medium and long-term strategic direction” it had outlined at its inaugural investor day in January.
As part of its pitch about a lift to flagging returns, the 150-year-old bank vowed to invest in new businesses including cash management and digital banking and grow existing ones such as wealth management and private equity. Goldman paid a dividend of $1.25 a share for the March quarter.
The Fed last week capped dividends at the lesser of historic payments and recent earnings, to prevent banks from depleting their capital while facing loan losses of as much as $700bn in the economic fallout from the coronavirus crisis.
Wells Fargo said its third-quarter dividend would have to be “reduced” from its current level of $0.51 because second-quarter earnings will be affected by a “substantially” bigger increase in loan loss provisions than the $3.1bn jump in the first quarter.
“There remains great uncertainty in the path of the economic recovery and though it’s difficult to accurately predict the ultimate impact on our credit portfolio, our economic assumptions have changed significantly since last quarter,” Charlie Scharf, chief executive, said. The bank will give details of the new dividend at its second-quarter earnings on July 14.
Morgan Stanley, which most closely resembles Goldman in its business, on Monday night said that it had been given a stress capital buffer of 5.9 per cent, taking its total CET1 requirement to 13.4 per cent. Morgan Stanley’s CET1 ratio was 15.7 per cent at the end of March.
“The CCAR [stress test] 2020 results affirm our strong capital position and reflect the stability of our business model,” said James Gorman, Morgan Stanley’s chief executive, outlining plans to continue to pay a quarterly common stock dividend of $0.35 a share.
The Fed set JPMorgan Chase’s stress capital buffer at 3.3 per cent, taking its total capital requirements to 11.3 per cent, or below the 11.5 per cent it posted at the end of March.
“The firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positions,” Jamie Dimon, JPMorgan’s chief executive, said. “If there is a significant deterioration in the future outlook, the firm will, of course, consider reducing dividends.”
Bank of America said its stress capital buffer was 2.5 per cent, resulting in a total CET1 requirement of 9.5 per cent, below the 10.8 per cent ratio the bank posted at the end of March. It plans to continue paying a dividend of $0.18 a share.
Citigroup was also given a stress capital buffer of 2.5 per cent, taking its total CET1 requirement to 10 per cent, a higher level than BofA since Citi is a bigger bank and therefore has a higher capital surcharge for its size. Citi’s total requirement is now 10 per cent, lower than the 11.2 per cent it reported at the end of March.
“These results are consistent with our expectations, and indicate that we have the capacity to withstand extreme stress,” said Mike Corbat, Citi chief executive, adding that the bank would maintain is $0.51 a share dividend “subject to the latest financial and macroeconomic conditions”.