Stress test discrepancy prompts Bank of America to delay dividend announcement

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Bank of America has delayed a dividend announcement after the Federal Reserve’s annual stress test showed a significant discrepancy between how the regulator and the lender’s own risk managers predicted it would fare in an extreme downturn.

The Fed predicted BofA would in fact perform more favourably than the bank’s own models suggested, losing less money and maintaining a higher capital ratio.

However, the discrepancy prompted BofA to delay an announcement it had planned to make on Friday evening detailing its dividend and capital requirements, according to a person familiar with the matter.

The bank was expected to tell investors it was raising its dividend but the lack of an announcement was conspicuous by its absence given that all of the other large US banks updated investors on their plans on Friday.

“This is odd,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “It’s not normal.”

The Fed released the results of its annual bank stress tests last week. The tests, which were put in place after the 2008 financial crisis, are closely watched by investors because they are used by regulators to determine how much capital banks must hold for the next 12 months.

As long as banks match or exceed the requirements, they are free from Fed restrictions on how much of their earnings they can pay out to shareholders via dividends and share buybacks.

BofA on Monday released a statement saying it had contacted the central bank to find out why the regulator’s results were different from its own.

BofA declined to comment further.

The company’s internal stress test showed it would lose $52bn in a severe economic downturn and that its capital as a percentage of total assets would fall at most to 8.3 per cent, the bank told investors on Monday. The Fed, however, estimated BofA would lose only $23bn, and that its capital ratio would slump to 10.6 per cent.

Goldman Sachs also outperformed its own estimates, predicting its capital ratio would fall to a low of 9.5 per cent in a severe recession compared with 10.1 per cent pencilled in by the Fed. The internal stress test results of JPMorgan and Morgan Stanley were in line with the central bank’s estimates.

The Fed predicted Citigroup’s capital ratio would fall to 9.1 per cent, which was worse than bank’s own estimate of 10.6 per cent. Citi on Friday said it was disappointed with the outcome of its stress test, but increased its dividend anyway. Wells Fargo has yet to release the results of its internal tests.

Scott Siefers, a bank analyst at Piper Sandler, said the biggest reason for the BofA discrepancy was large unrealised losses in its bond portfolio, which have jumped because of rising interest rates.

This year’s stress test involved a scenario where interest rates fell from their recent highs to near zero. The Fed said BofA would book a $22bn gain from the hypothetical drop in rates. BofA, which has maintained that the unrealised losses are not a problem, said a theoretical drop in rates during a recession would have little effect on the value of its bond portfolio.

If the Fed’s stress test scenario had involved a big increase in interest rates, BofA would have fared significantly worse.

BofA shares on Monday rose 1.8 per cent, in line with rivals. Siefers and other analysts said, despite the delay, they still expected the company will announce a dividend increase soon.

“We appreciate that BofA is being transparent in its desire to understand the . . . difference between its own test and the Fed’s,” said Siefers in a note to clients. “Bottom line, a little more uncertainty in BofA’s results than we would like, but hopefully no change to the end result.”