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.”


China sorghum imports jump after Beijing dropped probe into US shipments: Customs

Updated 1 min 38 sec ago
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China sorghum imports jump after Beijing dropped probe into US shipments: Customs

  • China brought in 450,000 tons of sorghum in June, up from last year’s 324,301 tons
  • Corn buyers, meanwhile, scooped up cargoes on worries over the return of US-China trade policy tit-for-tat amid high domestic prices

BEIJING: China’s sorghum imports in June surged 38.1 percent on year, boosted by a temporary easing of Sino-US trade tensions, while corn imports for the month rose to one of highest levels in the past decade, customs data showed on Monday.
China brought in 450,000 tons of sorghum in June, up from last year’s 324,301 tons. Volumes were still down slightly from 470,000 tons in May, data from the General Administration of Customs showed.
Beijing announced in mid-April that importers of sorghum from the United States would have to put up a 178.6 percent deposit on the value of shipments. Several cargoes already on the way changed course and were diverted to other markets.
A month later in a goodwill measure, however, China dropped the deposit and an anti-dumping probe into US sorghum imports as the two sides appeared to be reaching consensus on resolving trade issues.
“Some cargoes were already on the way to China when Beijing dropped the deposit. Then they cleared customs in weeks after. That should have pushed up the June volumes,” said Cherry Zhang, an analyst with Shanghai JC Intelligent Co. Ltd, before the data release.
Corn buyers, meanwhile, scooped up cargoes on worries over the return of US-China trade policy tit-for-tat amid high domestic prices.
Corn imports in June hit 520,000 tons, up 34.6 percent from a year ago and the second highest since July last year. The figures were down from 760,000 tons in May, the data showed.
The corn imports in the first six months tripled to 2.21 million tons, already close to China’s total 2017 purchase of 2.82 million tons of the grain, according to the data.
“There were margins importing corn as domestic corn prices were relatively high. And buyers were buying more corn in recent couple of months to prepare for the Sino-US trade tension in advance,” said Meng Jinhui, an analyst with Shengda Futures.
UScorn and sorghum shipments to China should drop significantly in July and August, analysts and traders said, as Beijing imposed a 25 percent tariff on US grains on July 6.
China buys almost all its sorghum imports from the United States.
In the first half of this year, China has brought in 3.25 million tons of sorghum, up 8.7 percent from the same period of 2017, the data showed.
China also brought in 590,000 tons of barley in June, down 5.6 percent from a year ago. Barley imports for the first half of the year were at 4.4 million tons, down 2.7 percent.
Wheat imports were at 310,000 tons in June, down 33.6 percent from a year ago. Wheat imports for the first half were at 1.95 million tons, down 26.4 percent, the data showed.
China bought 280,000 tons of sugar and 98,566 tons of pork in June. In the first half of the year, China’s sugar imports were at 1.38 million tons, and shipments of pork were at 647,985 tons, both down from last year’s levels.