The eight banks — deemed by U.S. regulators to be the most important to the financial system — had set out to collectively repurchase $119 billion of shares in the four quarters after the Federal Reserve’s stress tests last June. Spread out evenly, that would mean they will keep roughly $30 billion. They’re forgoing the chance to buy back cheaper shares for a bigger cushion to absorb losses on souring loans, or more ammunition to help companies that might draw down their credit lines.
The decision came just as the Fed announced it’s cutting interest rates further to soften the economic impact of the coronavirus pandemic.
“Consider this a preemptive action to support customers,” said Susan Katzke, an analyst at Credit Suisse Group AG in a note. “A smart, prudent, coordinated move.”
The move allows the banks to protect capital from a position of strength, averting the possibility of regulators asking one or more of them to pause buybacks. Still, it comes with a cost, as some investors would’ve likely preferred the lenders snatch up billions worth of shares at depressed valuations — or at least provide some support for stock prices that have fallen at least 22% this year at all eight firms.
Other firms in the group are Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp. and State Street Corp. Regional lender U.S. Bancorp separately announced it also will halt buybacks through the second quarter.
The announcements didn’t say anything about dividends, but in a separate statement, JPMorgan said its dividend payouts wouldn’t change. The eight banks had said in June they planned to disburse $37 billion that way.
The move contrasts with the 2008 credit crisis, when banks were lambasted for waiting too long to suspend cuts to dividends and buybacks, leaving themselves too thinly capitalized as losses from the housing meltdown piled up. That led to government bailouts. Since then, regulators have forced the largest lenders to build up much bigger capital cushions. The firms are getting ready to submit data for this year’s stress tests.
The eight firms said they notified the Fed of their decision. On Sunday, the central bank cut its benchmark interest rate by a full percentage point to near zero and promised to boost its bond holdings by at least $700 billion in a fresh bid to save the U.S. economy amid measures to stop the virus’s spread.
(Updates with U.S. Bancorp in the seventh paragraph)
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