Bank investors await US stress test results for capital returns

The US Federal Reserve examines the health of the balance sheets of the biggest financial firms every year to ensure that they have enough capital to withstand a shock to the system. (Reuters)
Updated 21 June 2018
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Bank investors await US stress test results for capital returns

  • Banks will be able to unveil capital return plans for the coming year next week after the Fed issues its second set of results that determine how much of a capital buffer the banks need
  • Payout levels and market reactions will vary from bank to bank, according to Mike Mattioli, portfolio manager at Manulife Asset Management in Boston

NEW YORK: US investors expect banks and other financial institutions to announce large returns of capital to shareholders after the Federal Reserve publishes the first set of results from its annual “stress test” late Thursday.
Even so, gains in financial shares may be muted. Many of the 38 financial firms undergoing the test are expected to boost dividends and share buybacks due to higher profits on the back of tax cuts and rising net interest income.
Banks will be able to unveil capital return plans for the coming year next week after the Fed issues its second set of results that determine how much of a capital buffer the banks need.
The Fed examines the health of the balance sheets of the biggest financial firms every year to ensure that they have enough capital to withstand a shock to the system in the wake of the 2007-09 financial crisis.
“General headlines will be constructive with the vast majority of banks increasing their dividends and buying back more stock,” said Jason Goldberg, a bank analyst at Barclays.
Goldberg estimates that the 22 banks he covers should be able to announce returns of 103 percent of earnings compared with an estimated 86 percent for the year that ends in June.
Celebrations may be somewhat overshadowed however by loan growth data and a flattening yield curve, according to Sameer Samana, global equity and technical strategist at Wells Fargo Investment Institute in St. Louis.
“(Stress test results) could be a catalyst for a day or two but it’ll still come back to the main driver which is going to be the yield curve and loan growth, which has been OK but nothing to write home about,” said Samana.
Bank profits are boosted by a steepening yield curve, when the gap is widening between short-dated treasury yields and long-dated treasury yields. Banks profit from the difference between short-term rates, which determine their borrowing costs, and long-term rates, which affect how much they can charge for loans such as mortgages.
The spread between US Treasuries 2-year and 10-year yields has not been this narrow in a flattening process since 2005.
On June 29 last year, after banks released their capital plans following the stress test, the S&P 500 bank index ended the day 1.8 percent higher.
Last year’s approval marked the first time since the financial crisis the industry was given the go ahead to pay out as much as it reports in annual profits.
The largest US banks have notably underperformed their smaller, regional rivals so far in 2018.
The S&P 500 bank index was last showing a year-to-date decline of 2.4 percent after gaining 20 percent in 2017. In comparison the KBW Regional Bank index is up 8.4 percent for the year to date after falling 0.3 percent last year.
For this year’s returns, Keefe Bruyette & Woods analysts in research reports cut their payout assumptions for the median bank to 102 percent of earnings compared with a previous expectation for 120 percent as the stress test was tougher than he had originally expected.
KBW analysts said they were optimistic on payouts from banks including Citigroup Inc, Bank of America Corp, Wells Fargo & Co, BB&T Corp, Huntington Bancshares Inc, Comerica Inc, Citizens Financial Group Inc, Zions Bancorp and asset manager Northern Trust Corp.
The firm has cautious views on capital payouts on firms including Goldman Sachs Group Inc, Fifth Third Bancorp , KeyCorp, Regions Financial Corp, CIT Group Inc, SunTrust Banks Inc, Ally Financial Inc, American Express Co, Capital One Financial Corp, Discover Financial Services and M&T Bank Corp.
Bernstein analyst John McDonald in a report said he expects capital return dollars to grow but said that he does not think everybody will increase payout dollars as “firms are up against a harsher test and many have lower starting capital positions.”
Payout levels and market reactions will vary from bank to bank, according to Mike Mattioli, portfolio manager at Manulife Asset Management in Boston.
“I don’t think it’ll be a major catalyst. The thing people will be looking for is if anybody failed,” said Mattioli. “There’ll be some surprises on the upside or the downside but it shouldn’t move stocks in double-digit percentage changes.”


Danske Bank money laundering ‘giga scandal’ spreads to Britain

Updated 11 min 25 sec ago
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Danske Bank money laundering ‘giga scandal’ spreads to Britain

  • By 2013, the number of UK-registered customers in the branch’s non-resident portfolio had topped 1,000
  • Danske Bank Chairman Ole Andersen said that the lender had made an assessment of whether it violated any US laws
LONDON/COPENHAGEN: Danske Bank’s money laundering scandal spread on Friday as Britain’s National Crime Agency (NCA) said it is investigating the use of UK-registered companies.
“This is a giga scandal,” European Union Competition Commissioner Margrethe Vestager said, joining a growing chorus of calls for a clampdown on the billions of euros which are alleged to have been “washed” through European banks.
An NCA spokeswoman said the British agency was working with partners across government to restrict the ability of criminals to use UK-registered companies in money laundering.
British and Russian entities dominate a list of accounts used to make €200 billion ($236 billion) in payments through Danske Bank’s branch in Estonia between 2007 and 2015, many of which the bank said this week are suspicious.
By 2013, the number of UK-registered customers in the branch’s non-resident portfolio had topped 1,000, Danske Bank’s investigation revealed, ahead of clients from Russia, the British Virgin Islands and Finland.
As the scope of the alleged money laundering through Danske Bank has widened, investor concerns over the potential penalties it could face have increased, with particular focus on what action if any US authorities might take against the bank.
So far, the US has not said whether it is investigating, although Danske Bank Chairman Ole Andersen said that the lender had made an assessment of whether it violated any US laws. He has declined to share the bank’s conclusion of this.
“We need to do more to prevent money laundering from happening,” Vestager told reporters in Copenhagen following the resignation on Wednesday of Danske Bank CEO Thomas Borgen after an investigation commissioned by the bank exposed past control and compliance failings.
Borgen, 54, was in charge of Danske Bank’s international operations including Estonia between 2009 and 2012.
He said on Wednesday that he had been “personally cleared from a legal point of view” while Danske said its board had not breached their legal obligations.
The European Commission last week recommended banking supervision changes, including bolstering national authorities, but stopped short of setting up a new financial crime agency called for by the European Central Bank.
In a sign of the growing pressure on Danske Bank, which already faces criminal inquiries in Denmark and Estonia, the chief executive of CARE Danmark said on Twitter that the Danish charity had decided to end its relationship with the lender.
International aid charity Oxfam also called on Danish municipalities to cut ties with the bank, saying it has not been able to re-establish the trust of Danish citizens.
The mayor of Aalborg, Denmark’s third largest municipality, said he would discuss its partnership with Danske Bank at the next municipality committee meeting, but noted that there were only two banks in Denmark would be able to handle a municipality its size.
“Danske Bank has been involved in money laundering which is deeply reprehensible and outrageous but Nordea has been involved in tax havens, so the entire bank sector needs to clean up for us to have a trusting collaboration with the banks,” Thomas Kastrup-Larsen said.
Danske Bank’s tiny Estonian branch accounted for as much as 10 percent of group profit during the period when suspected money laundering was conducted via its operations there.