Dividend restrictions will end for banks after June 30, Fed says

Hefty cash giveaways could be on tap for investors in bank stocks, thanks to the Federal Reserve. Yahoo Finance’s Emily McCormick shares the details.

Video Transcript

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BRIAN SOZZI: Some pretty hefty cash giveaways could be on tap for investors in bank stocks thanks to the Federal Reserve. Yahoo Finance's Emily McCormick has the details, Emily.

EMILY MCCORMICK: Well, Brian, major US banks will be allowed to return more capital to shareholders later this year. The Fed announcing yesterday that banks that clear their next stress test will be allowed to resume increasing their dividends and stock buyback programs at the end of June. So this does mean that banks are still going to need to show sufficient capital levels next quarter, although most major US banks did clear that last stress test back in December. So likely that we will see this restriction actually get lifted for all the major US banks.

But this move is going to remove a huge drag on many of the big banks. It was last June 2020 that the Fed first suspended buybacks and capped those dividend payments at the banks to ensure that the companies would still be shoring up enough capital in the event that the pandemic meant. It meant that they'd be needing to do more loans or preparing for widespread loan defaults. And we also saw that the big banks had massively built up their loan loss provisions in most quarters last year for that same reason.

But we should note that many of these concerns about souring loans didn't end up manifesting. And again, we did see in December that after the last round of stress tests that the Fed did ease restrictions on buybacks and allowed banks to pay dividends and make share repurchases that did not exceed the bank's average net income over the prior year. So this latest announcement is really just the next phase in easing those restrictions.

And taking a look at some stock action here, we are seeing shares of JPMorgan, Goldman Sachs, Citigroup, really all these major banks on the rise today in the wake of this announcement. We should note that the banking sector, or rather the financial sector of the S&P 500 has been outperforming for the year to date, Brian.

JULIE HYMAN: Yeah, I'm going to chime in on this too, Emily, because you know, to that last point, we have seen an enormous amount of enthusiasm for the financial stocks. As we have seen everything else seems to be a little bit disturbed by yields going up, but it's a good thing for the financials in the eyes of investors. And it's seen of course, also as one of the big cyclical groups. So you have to wonder if this-- those aren't huge gains that you referred to in the pre-market, but still reflective of already enthusiasm among investors.

EMILY MCCORMICK: That's right. And I think to again, to your point, Julie, about yields going up, that's of course, something that we're going to see really impact and improve banks' net income and their net interest income rather. And when we think about the fact that their profitability is so tied to the yield curve, to the benchmark 10 year yield actually moving up, we have seen the banks move up in tandem with this move in the Treasury markets.

But then again, just taking a look at some of these biggest bank stocks, we already had JPMorgan, Goldman Sachs, really reporting record revenues, record net income, even in the wake of the pandemic, if we look back at some of their latest quarterly reports. So even given these restrictions that had been placed on the stock buybacks that banks could actually give out over the past couple of quarters really benefited some of these banks that had these high levels of profitability. So some of these smaller banks, Wells Fargo, Citigroup, assuming that they do pass this next stress test are really going to be the big beneficiaries here since that will really unlock another level of restrictions here for these banks especially, Julie and Brian.

BRIAN SOZZI: Emily McCormick, good to see you.