Fed may ease stress capital buffers for Goldman, Citi and other big banks: analysts

By Steve Gelsi

KBW sees cuts in Goldman and Citi balance-sheet requirements, while Truist and KeyCorp may see an increase

The Federal Reserve may increase stress capital buffers at Truist Financial Corp. and KeyCorp and ease them for Goldman Sachs Group Inc., Citigroup Inc. and other big banks when the central bank releases stress-test results Thursday, analysts at KBW said.

The Fed uses the stress tests to help determine stress capital buffers, an important bank balance-sheet component designed to protect against shocks to a bank's system.

The Fed's annual stress tests are important to bank shareholders because they often have an impact on dividends and stock buybacks, which typically enrich the value of share prices.

KBW analyst David Konrad said his team expects pressure on KeyCorp's (KEY) preprovision net revenue due to low-yield swaps and securities on its balance sheet, although the bank's credit losses should hold up.

KBW analysts estimate a stress capital buffer of 3.4% of KeyCorp's balance sheet, but that should be reduced by 2025's test as the bank reprices securities on its balance sheet. KBW does not expect KeyCorp to issue any stock buybacks through 2025.

For Truist Financial (TFC), KBW estimates a 0.6% increase to stress capital buffers to 3.5% as its preprovision net revenue falls. KBW is projecting Truist's 3.5% capital buffer to fall in the coming year as the bank restructures its securities.

Since Truist has excess capital from the sale of its Truist Insurance Holdings unit, KBW's Konrad does not expect the test to have a material impact on Truist's stock buybacks starting in the second half of 2024.

While Truist and KeyCorp may have higher capital requirements, they also provide the highest dividend yields of about 6%, KBW noted.

Meanwhile, KBW is projecting a 0.4 % drop in stress capital buffers to 3.9% for Citigroup Inc. (C)

Citi has sold most of its international consumer loans, while its domestic credit-cards business has grown, the analysts said.

Goldman Sachs Group Inc. (GS) will likely see its stress capital buffer requirement drop by 0.6% to 4 .9% "due to lower exposure to equity and real-estate investments," they said.

KBW estimates that M&T Bank Corp.'s (MTB) stress capital buffer will fall by 0.5% to 3.5%, after it trimmed its exposure to commercial real estate, while Huntington Bancshares Inc. (HBAN) is projected to get a 0.5% reduction in its stress capital buffer to 2.7%.

M&T Bank, Charles Schwab Corp. (SCHW) and Bank of America Corp. (BAC) offer "the largest positive for buyback assumptions" versus Wall Street expectations over the next four quarters, the analysts noted, while Bank of New York Mellon Corp. (BK), Morgan Stanley (MS), M&T Bank and State Street Corp. (STT) are expected to have the highest dividend-payout ratios.

In its 2024 stress-test scenarios laid out in February, the Federal Reserve weighs banks' financial strength against a "severe global recession," along with "heightened stress" in both residential and commercial real estate and upheaval in corporate debt markets.

The scenarios includes a U.S. unemployment rate of 10% by the third quarter of 2025, a 36% drop in home prices and a 40% fall in commercial real-estate prices.

Depending on how much regulators assign to their minimum stress capital buffers after the test, banks often determine how much money is left over for divided payouts and stock buybacks.

"The Federal Reserve's stress test assesses whether banks are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses," according to a definition by the Federal Reserve.

The stress tests mark the second year since Michael Barr took up the reins as head of supervision at the Federal Reserve.

The 2024 stress test results are scheduled for release on Wednesday afternoon.

-Steve Gelsi

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06-25-24 0741ET

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