Morgan Stanley (MS) shares leaped higher Tuesday, pacing gains for Wall Street rivals such as Goldman Sachs (GS), Wells Fargo (WFC) and Bank of America (BAC), as the country's biggest lenders unveiled dividend hikes in the wake of the Federal Reserve's annual bank stress tests.
Morgan Stanley increased its quarterly dividend by 11%, to 77.5 cents per share, following last week's Fed tests, while authorizing a $20 billion share buyback. Goldman boosted its payout by 25%, to $2.50 per share while Wells Fargo said it plays to 20% hike, to 30 cents per share.
JPMorgan (JPM) said it would hold its dividend in place at $1 per share "in light of higher future capital requirements" while Citigroup (C) may update investors later next month.
"The strength and stability of our franchise and our capital cushion provide us the flexibility to continue to invest for future growth while also returning capital to shareholders," said Morgan Stanley CEO James Gorman.
Morgan Stanley shares were marked 4.15% higher in early trading at $80.64 each, while Wells Fargo and Bank of America gained 3.2% and 2.8% respectively. Goldman Sachs was marked 2.27% higher at $307.40 each while JPMorgan rose 2.4% to $119.12 each.
All 33 U.S.-based banks, with more than $100 billion in collective assets, passed the Fed's annual 'stress test' last week, a report card put in place in the wake of the global financial crisis that probes a bank's ability to keep enough capital on hand to absorb losses -- and protect depositors -- in the event of a severe recession.
Under the Fed's toughened conditions, which included a surge in the headline unemployment rate, to 10%, paired with a severe economic downturn, a 40% collapse in commercial real estate and a 55% decline in domestic stock prices, the Fed said banks would take around $612 billion in total losses, but still maintain healthy capital buffers that would allow for improved shareholder payouts.
"The tests evaluate the resilience of large banks by estimating their capital levels, losses, revenue and expenses under hypothetical scenarios over nine future quarters," the Fed said.
"This year's hypothetical scenario is tougher than the 2021 test, by design, and includes a severe global recession with substantial stress in commercial real estate and corporate debt markets."
That said, slowing economic growth, a pullback in consumer spending, muted merger activity and a big jump in short-term interest rates has clipped bank profits in 2022, leaving banks will less to hand over to shareholders than in recent years.
First quarter profits from the four biggest U.S. banks were down 33% from last year as the country's biggest lenders set aside billions to absorb potential bad loan losses as well as exposures linked to Russia.
JPMorgan CEO Jamie Dimon cautioned in April on the impact of the Russia-Ukraine conflict on the bank's profits, while also warning that rate hikes from the Federal Reserve "could be significantly higher than the market expects" between now and the end of the year.
Still, JPMorgan said only last month that its full-year net interest income, a key gauge of bank profitability, would rise to $56 billion this year, a noted improvement from a target of "in excess of $53 billion" it published alongside its first quarter earnings last month.
The U.S.'s biggest commercial and investment bank also said it should meet a return on tangible capital equity target of 17% as it hold annual expenses at around $77 billion, although CFO Jeremy Barnum said inflation could lift that tally to as high as $79.5 billion.
