Pack of regionals can satisfy stress tests with minimum buffer

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A half-dozen regional banks on Tuesday reported needing only the minimum amount of extra capital to get through a severe economic downturn as modeled by the Federal Reserve stress tests completed last week.

U.S. Bancorp, PNC Financial Services Group, Fifth Third Bancorp, Huntington Bancshares, KeyCorp and M&T Bank Corp. each announced needing a 2.5% stress capital buffer as part of their Dodd-Frank stress-test results.

Truist Financial Corp. reported needing a 2.7% buffer, though the Charlotte, N.C.-based company said differences between its internal outcomes and the Fed’s could be caused by certain accounting treatments for the BB&T-SunTrust merger last year that created Truist.

Regions Financial in Birmingham, Ala., said it needs a 3% stress capital buffer. The company said in its announcement that its proactive interest rate hedging program, which it began this year, “will provide substantial resilience” to its pretax pre-provision net revenue — a key metric used by the Fed in its stress testing this year.

The stress capital buffer is the difference between a bank’s capital level as the “severely adverse” scenario under the stress tests began and where it was projected to end up, taking into consideration what the banks planned to pay out in dividends.

The lower the stress capital buffer, the better the bank is seen to have performed under the stress test, with the minimum being 2.5% that must be held held starting in October through September 2021.

By Aug. 31, the Fed will finalize what buffers are required for the 33 banks that underwent stress tests.

Several big banking companies like Goldman Sachs, Morgan Stanley, Capital One and JPMorgan Chase reported needing higher buffers on Monday.

The credit card company American Express on Tuesday reported a 2.5% stress capital buffer. A rival, Discover, on Monday reported needing a 3.5% buffer.

All eight regional banks that reported Tuesday that they would be keeping their dividends steady. The Fed last week ordered banks to cap third-quarter dividends at second-quarter levels, though it said it could require even lower payouts in some cases depending on recent earnings history.

“The stress-test results reaffirm our belief that our already strong capital ratios would remain above buffered minimum levels for the duration of a nine-quarter severely adverse stress test, while maintaining our dividend and continuing to provide support to the broader economy,” Fifth Third CEO and Chairman Greg Carmichael said in a statement announcing the Cincinnati bank would be holding its dividend at 27 cents a share.

Huntington, in nearby Columbus, Ohio, had been one of the banks with a dividend payment approaching the ceiling established by the Fed. Huntington’s ratio of dividends to profits from the third quarter of 2019 through the second quarter of 2020 has been projected by the research firm Janney Montgomery Scott to be 84%; the Fed had said banks payouts cannot exceed 100% over that time frame.

Huntington intends to keep its dividend at 15 cents per share, pending official approval by its board of directors in July.

“We have strong capital and robust liquidity, and our core earnings power remains solid,” Huntington Chairman and CEO Stephen Steinour said in a statement.

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Capital Stress tests Regional banks Federal Reserve Coronavirus