Truist Financial Corp. has received a higher rating from the Federal Reserve Board in what is becoming a key stress-test measuring stick during the COVID-19 pandemic.
The Fed adjusted the annual Dodd-Frank Act capital plan guidelines in March to include what is known as a stress capital buffer. The buffer represents a percentage amount of excess capital a company must hold above its minimum capital requirements. A floor percentage of 2.5% was established.
The Fed has disclosed a preliminary percentage for each of the 33 financial institutions operating in the U.S. with at least $100 million in total assets. The final percentage is due to be set by Aug. 31 and go into effect for the period of Oct. 1, 2020, through Sept. 30, 2021.
Truist said Tuesday that its buffer percentage was 2.7%, which allows it to maintain a 45-cent dividend for at least the third quarter.
Of the 16 U.S. financial institutions that have disclosed their preliminary percentages, nine were at the 2.5% floor — American Express, Bank of America Corp., Bank of New York Mellon Corp., Citigroup, Huntington Bancshares Inc., KeyCorp, State Street Corp., US Bancorp and Wells Fargo & Co.
The highest percentage was Goldman Sachs at 6.7%, followed by Morgan Stanley at 5.9%.
The Fed prohibited banks from conducting most share repurchases in the third quarter, which most already had suspended because of realized and projected revenue reductions for fiscal 2020.
Banks would be allowed to raise their quarterly dividend if it doesn’t exceed an amount equal to the average of its net income for the four preceding quarters.
However, none of the 16 U.S. financial institutions that have disclosed their buffer percentage has indicated plans to raise their quarterly dividend.
The majority of U.S.-based banks have disclosed their percentages, while the 10 U.S. subsidiaries of foreign-owned banks had not as of Tuesday.
Of those banks, only Wells Fargo has indicated that being at the 2.5% buffer floor will require a dividend cut.
Wells Fargo has paid a 51-cent per share quarterly dividend since getting the Fed’s approval of its 2019 capital plan. The bank will disclose its third-quarter dividend as part of its second-quarter earnings report on July 14.
“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, Wells Fargo’s chief executive, said in a statement Monday.
Wells Fargo, Scharf warned , expects “an increase in the allowance for credit losses substantially higher than the increase in the first quarter.” On April 14, the bank set aside $3.83 billion in its loan-loss provision for the first quarter to help absorb losses on loans it expects won’t be repaid on time.
By comparison, Wells Fargo had a loan-loss provision of $644 million in the fourth quarter and $845 million a year ago.
Truist set aside $893 million in its first-quarter provision.
Wells Fargo’s first-quarter net income plunged to $42 million, compared with $5.51 billion for the same period a year ago and $2.55 billion in the fourth quarter.
The global law firm of Morrison Foerster said in a blog that Federal Reserve examiners review capital adequacy of large financial institutions on an annual basis, based upon an assessment of a firm’s expected sources and uses of capital during a nine-quarter planning horizon.
“Going forward, a (Fed) determination will be made based upon: a reduced list of capital requirements; the buffer requirement; and any applicable enhanced supplementary leverage ratio imposed upon global systematic important bank holding companies,” the law firm said.“If a (financial institution) fails to satisfy these requirements, it would face limitations and restrictions on its ability to make capital distributions.”
The severe downturn time frame measured by the Fed is the first quarter of 2019 to the third quarter of 2021.
The pre-pandemic downturn metrics included an 8.5% decline in real gross domestic products from first quarter 2019 to third quarter 2021; 10% U.S. unemployment rate; 28% decline in home prices; 35% decline in commercial real-estate prices; and a 50% decline in the Dow Jones Industrial Index.
The U.S. jobless rate was 4.4% in March, 14.7% in April and 13.3% in May.
Because the COVID-19 pandemic had led to a more severe downturn, the Fed conducted an additional three stress-test scenarios: a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession.
In those scenarios, the U.S. jobless rate was projected during the measurement period at between 15.6% and 19.5%.
The Fed said that under the U- and W-shaped scenarios, “most firms remain well capitalized, but several would approach minimum capital levels.”
“The sensitivity analysis does not incorporate the potential effects of government stimulus payments and expanded unemployment insurance.”