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Goldman Sachs, Morgan Stanley must keep capital return plans unchanged after Fed stress test blunder


Instead, Goldman Sachs said it would return no more than $6.3 billion in capital in the year starting in the third quarter. It is raising its dividend 5 cents to 85 cents a share, but that doesn’t kick in until next year’s second quarter. Morgan Stanley said it would distribute an amount consistent with the $6.8 billion it gave out last year, including raising its dividend by 5 cents to 30 cents a share beginning in the third quarter this year.

“Morgan Stanley was definitely a disappointment on the buyback, and Goldman was on the low end of the range I was expecting,” said Charlie Peabody, analyst at Portales Partners LLC.

Even though the companies said they would raise their dividends, the payouts are lower than expectations, Peabody said. Morgan Stanley’s annual $1.20 a share dividend compares to expectations for $1.24, and Goldman’s $3.20 a share dividend compares to expectations for $3.36.

After the two banks squeaked by the initial version of the test last week, they both issued public statements indicating confidence they could return more capital to shareholders than the regulators’ figures suggested. “Our models and the Federal Reserve’s models diverge, which we expect to discuss with the Federal Reserve,” Goldman said at the time.

In the annual ritual, banks must show that they can survive an economic downturn with enough capital to keep lending, while taking into account the capital leaving in the form of dividends and share repurchases. Capital, the difference between a bank’s assets and liabilities, is the cushion banks use to absorb unexpected losses. The 2018 version used one of the most severe hypothetical economic scenarios since starting the tests in 2009. It assumed unemployment at 10 percent, losses in corporate and real estate loans, and difficult conditions overseas.

After the tax overhaul was announced late last year, Goldman Sachs announced earnings were taking a $5 billion hit, mostly tied to a bill from repatriating earnings. Morgan Stanley took a $1.4 billion hit because of the lowered value of deferred tax assets.

Another bank, Boston-based State Street, also got a conditional non-objection. It has to take steps to improve its management of counter-party risk under stressful scenarios.

But the Fed saved its worst grade for the U.S. division of Deutsche Bank, which the Fed has previously deemed a troubled institution. The Fed said it objected to the capital plan of DB USA over concerns of the firm’s management of data and its capital planning and weaknesses in forecasting revenues and losses. U.S. shares of Deutsche Bank fell about 1 percent in extended trading.

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June 29, 2018

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