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 the regulator’s and the lender’s own risk managers’ prediction that it would be highly bearish.

The Fed predicted that BofA would actually perform more favorably than the bank’s suggested model, losing less money and maintaining a higher capital ratio.

However, the discrepancy prompted BofA to delay an announcement it had planned for 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 as all other big US banks updated investors on their plans on Friday.

“It’s strange,” said Gerard Cassidy, banking analyst at RBC Capital Markets. “this is not normal.”

The Fed released the results of its annual bank stress test 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 through dividends and stock buybacks.

On Monday, BofA issued a statement saying it had contacted the Fed to find out why the regulator’s results differed from its own. BofA declined to comment further.

BofA’s internal stress tests showed it would lose $52 billion in a severe economic downturn and its capital as a percentage of total assets would drop to a maximum of 8.3 percent, the bank told investors on Monday. However, the Fed estimates that BofA will lose only $23 billion, and its capital ratio will drop to 10.6 percent.

Goldman Sachs also outperformed its estimates, forecasting that a severe recession would see its capital ratio fall to a low of 9.5 percent, while the Fed projected 10.1 percent. Internal stress test results from JP Morgan and Morgan Stanley were in line with the central bank’s estimate. Citigroup and Wells Fargo have yet to release the results of their internal tests.

Scott Seifers, a bank analyst at Piper Sandler, said the biggest reason for the BofA discrepancy was large unrealized losses in its bond portfolio, which have been exacerbated by 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 the hypothetical drop in rates would benefit BofA by $22 billion. BofA, which has said that unrealized losses are not a problem, said a theoretical fall in rates during a recession would have little impact on the value of its bond portfolio.

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

Shares of BofA rose 1.8 percent on Monday, in line with rivals. Siffers and other analysts said, despite the delay, they still expect BofA to announce a dividend increase soon.

“We appreciate that BAC (BofA) has been transparent in its desire to understand. , , difference between its own test and the Fed’s,” Seafarers said in a note to clients. “The main takeaway is that there is a little more uncertainty in the BAC results than we expected, but hopefully that won’t change the final result.”