Passing the central bank’s exams this year would let Bank of America boost shareholder payouts 63 percent, more dramatically than its major rivals, according to analysts, who project the firm could disburse $9.1 billion through dividends and stock buybacks in the coming four quarters. Failing would frustrate shareholders after the firm stumbled in the past two exams, hurting investor returns and damaging management’s credibility.
“This is the make-or-break year,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods. “Everyone is expecting them to get better, not worse.”
The Fed’s simulated shocks and the U.K.’s potentially real one, as voters decide whether to withdraw from the European Union, land at a tough time for Bank of America and Chief Executive Officer Brian Moynihan. The stock has slumped 20 percent this year, making it the worst-performing bank in the 92-company S&P 500 Financials Index -- a situation that might change depending on what happens Thursday.
Jerry Dubrowski, a company spokesman, declined to comment.
The Fed will post results from the first phase of the annual tests at 4:30 p.m. in Washington, showing whether 33 firms with major U.S. operations are strong enough to withstand a hypothetical economic slump. That often serves as a harbinger for how they’ll do on the second phase of the exam due June 29, when banks learn whether they’ll be able to proceed with proposed shareholder payouts.
The six biggest U.S. banks probably will dole out more than $60 billion if they pass the exams, according to six analysts’ estimates compiled by Bloomberg. That’s up from about $50 billion in the four quarters ending this month, according to figures provided by Michael Mayo at CLSA Ltd.
Senior executives bemoan the unpredictability of the Fed’s results, saying examiners sometimes take surprisingly dim views of certain assets or cite unforeseen “qualitative” concerns, limiting payouts.
Citigroup CEO Michael Corbat’s job was on the line last year after his firm failed the previous test in 2014, its second rejection. Corbat pumped more than $180 million into rehabilitating internal systems as analysts suggested he would probably resign if his company flopped again. Last year, it passed with the cleanest marks of any global bank. Still, its shares haven’t fared much better than Bank of America’s this year, dropping 17 percent.
While Moynihan, 56, hasn’t drawn similar predictions, analysts say his team can’t afford a major misstep after his company muddled through past rounds. In 2014, the bank abandoned $4 billion of stock repurchases after discovering an accounting error. Last year, the firm scraped through, passing on the condition that managers fix deficiencies and resubmit their plan. The Fed endorsed a revised version in December.
Chief Financial Officer Paul Donofrio said in May that the lender’s aim is to be best-in-class on the Comprehensive Capital Analysis & Review, or CCAR, test.
“We feel good about the quantitative aspects of our CCAR submissions,” Donofrio said at an investor conference. “Qualitatively, we had a little extra time last year to work with the Fed one-on-one. And at the end of day, that was a pretty constructive event for us, because we learned a lot.”
The bank, like Citigroup, has paid penny and nickel dividends every quarter since the process began -- a fraction of what both firms doled out before the financial crisis. Moynihan allocated more than $100 million last year to overhaul controls and promoted veteran human-resources executive Andrea Smith to chief administrative officer, overseeing the stress-test submission. Another failure would stun investors, Kleinhanzl said.
“All the other banks are passing cleanly, so they need to catch up,” he said. “All there really is is downside risk that they have another stumble.”
Foreign lenders with large U.S. operations also are subject to the Fed’s test. Last year subsidiaries of Germany’s Deutsche Bank AG and Spain’s Banco Santander SA failed the test and saw capital plans rejected.
Wells Fargo & Co. probably will boost its annual payout 5.2 percent to $16.9 billion, the most of any firm, the analysts estimate. JPMorgan Chase & Co. may follow with $15.2 billion, according to the projections. That would account for 77 percent and 69 percent, respectively, of the companies’ estimated annual profits.
Bank of America and Citigroup probably asked to pay out lower rates because they risk coming across as too aggressive if they push regulators to let them close the gap immediately, according to Chris Kotowski, an analyst at Oppenheimer & Co. Citigroup may distribute $9.6 billion over the next 12 months, according to the analysts.
Citigroup, which has some of the highest capital ratios in the industry, could spend $18 billion on buybacks by 2019, Kotowski estimates. While the “pure math is somewhat less compelling” for Bank of America, the Charlotte, North Carolina-based lender could pay out $12 billion in buybacks in three years, he wrote in a June 7 report.
“Rome wasn’t built in a day,” Kotowski said in an interview. “These guys have so much credibility to regain and even if takes a couple years to regain it, I think there is substantial upside.”
To be sure, examiners keep moving the bar for the largest banks. Fed Governor Daniel Tarullo said this month that eight of the biggest U.S. firms probably will face a “significant increase” in capital targets next year, though other aspects of the exam may be eased.
Once firms learn how they fared this year, they can focus on that round. Devin Ryan, an analyst at JMP Securities, said he expects a continued “level of caution baked in.”
Few banks face as much pressure as Bank of America Corp. on Thursday, when the Federal Reserve posts initial results from annual stress tests just 30 minutes before U.K. polls close on the so-called Brexit vote.