Bank of America, Citigroup brace for annual stress tests

History of failure so far

Bank of America and Citigroup are set to receive their stress test results later this week, according to an article by Christina Rexrode for The Wall Street Journal.

Bank of America has failed the stress test three times, while Citigroup has failed it twice, according to the article. The banks could have paid out a combined total of $24 billion more to shareholders in the past three years if the companies’ level of dividends and share buybacks were similar to those of Wells Fargo.

From the article:

That they weren’t is partly due to the annual stress tests administered by the Federal Reserve. Bank of America and Citigroup each have stumbled on these in recent years.

The Fed will release the first round of this year’s stress-test results this Thursday. These will show how capital at 33 banks held up in severe market and economic conditions. The following week, banks will find out whether the Fed had approved their capital return plans.

To calculate capital returns that Bank of America and Citigroup shareholders have theoretically missed, the Journal examined how much they would have paid out if they had returned capital at the same rate as Wells Fargo. For example, Wells Fargo paid out dividends and bought back stock equal to 75% of its net income last year. Bank of America was at about 31%, while Citigroup was around 36%.

Over the past three years, the two banks returned a combined $19 billion to sharholders via dividends and buybacks. At Wells Fargo payout levels, they would have returned about $43 billion.

On the other hand, the Federal Reserve’s annual stress tests could be causing banks to restrict lending, or so says Bank of America CEO Brian Moynihan.

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