We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Will Goldman Stock Benefit as Fed Lowers Its SCB Requirement?
Read MoreHide Full Article
Goldman Sachs (GS - Free Report) came out as a winner after challenging the Federal Reserve to reduce its capital requirements over its June annual stress test result, which initially forced this Wall Street investment bank to hold a higher amount of capital.
Introduced in the aftermath of the 2008 financial crisis, the stress tests evaluate banks' capital adequacy, liquidity and risk management practices under adverse hypothetical scenarios, such as a deep recession or a sharp decline in asset prices. It then uses the results to calculate how much stress capital buffer (SCB) each lender requires to cover potential losses.
The Fed's estimate that Goldman would lose over $40 billion on its loans in the worst-case scenarios was challenged by GS following this stress test. In July, GS appealed to the Fed to reconsider its decision to increase the bank’s capital requirement after the Fed suggested one of the highest buffers after the initial stress test result released in June.
On Wednesday, the Fed announced that it had agreed to lower Goldman Sachs' burden after receiving additional information from the bank. This move by the Fed marks the first time the regulator approved such a request by a bank since the stress capital buffer requirement was imposed in 2020.
Before discussing the latest SCB requirement for GS suggested by the Fed, let’s recap the 2024 annual stress test.
2024 Fed Stress Test at a Glance
The Federal Reserve's annual ‘stress test’ exercised in June showed that the biggest U.S. banks would have enough capital to withstand severe economic and market turmoil but firms faced steeper hypothetical losses this year due to riskier portfolios.
The stress tests, mandated under the Dodd-Frank financial services law, were introduced in the aftermath of the 2008 financial crisis. It evaluates banks' capital adequacy, liquidity and risk management practices under adverse hypothetical scenarios, such as a deep recession and/or a sharp decline in asset prices.
Large banks, including JPMorgan & Chase (JPM - Free Report) and Citigroup (C - Free Report) , have been part of this process since the beginning. Banks with assets between $100 billion and $250 billion are tested every alternate year, effective 2019. This year, banks like Ally Financial, Citizens Financial Group and Fifth Third Bancorp are also part of the annual exercise.
The tested banks registered overall losses of 17.6% to existing loan balances on credit cards, and among them, Goldman recorded 25.4% in losses. GS had one of the biggest increases in SCB at 94 basis points.
JPM’s SCB requirement is 12.3% while C have to maintain an SCB of 12.1%.
Goldman Latest SCB Requirement
The central bank lowered the extra capital level requirement of Goldman Sachs. The bank now must hold a ‘stress capital buffer’ of 6.2%, down from the 6.4% suggested initially in the test.
With this, GS will be required to hold common equity equal to 13.7% of its risk-weighted assets (RWA), instead of the 13.9% the Fed initially advised.
Lower SCB Level to Aid Goldman’s Capital Distribution
Goldman rewards its shareholders handsomely. In July 2024, the company’s board of directors approved a 9.1% increase in the common stock dividend to $3 per share starting from third-quarter 2024. In the past five years, the company hiked dividends five times with an annualized growth rate of 24.42%. Currently, its payout ratio sits at 35% of earnings.
GS has a share repurchase program in place as well. In February 2023, it announced a share repurchase program, authorizing repurchases of up to $30 billion of common stock with no expiration date. As of Jun. 30, 2024, $19.2 million worth of shares remained available under the program. At that time, management stated that given the higher-than-expected stress capital buffer (SCB) requirement, the company plans moderate buybacks versus second-quarter levels.
We believe as GS’ capital requirement reduces, the bank can utilize this to increase capital distributions and buyback plans. Given its decent liquidity, such capital distribution activities seem sustainable. This is likely to stoke investors’ confidence in the stock.
Thus, it likley will help Goldman to witness more upward trend in its stock prices in the coming months.
In the past three months, GS’ shares have gained 11.8% compared with the industry’s growth of 1.6%.
Image: Bigstock
Will Goldman Stock Benefit as Fed Lowers Its SCB Requirement?
Goldman Sachs (GS - Free Report) came out as a winner after challenging the Federal Reserve to reduce its capital requirements over its June annual stress test result, which initially forced this Wall Street investment bank to hold a higher amount of capital.
Introduced in the aftermath of the 2008 financial crisis, the stress tests evaluate banks' capital adequacy, liquidity and risk management practices under adverse hypothetical scenarios, such as a deep recession or a sharp decline in asset prices. It then uses the results to calculate how much stress capital buffer (SCB) each lender requires to cover potential losses.
The Fed's estimate that Goldman would lose over $40 billion on its loans in the worst-case scenarios was challenged by GS following this stress test. In July, GS appealed to the Fed to reconsider its decision to increase the bank’s capital requirement after the Fed suggested one of the highest buffers after the initial stress test result released in June.
On Wednesday, the Fed announced that it had agreed to lower Goldman Sachs' burden after receiving additional information from the bank. This move by the Fed marks the first time the regulator approved such a request by a bank since the stress capital buffer requirement was imposed in 2020.
Before discussing the latest SCB requirement for GS suggested by the Fed, let’s recap the 2024 annual stress test.
2024 Fed Stress Test at a Glance
The Federal Reserve's annual ‘stress test’ exercised in June showed that the biggest U.S. banks would have enough capital to withstand severe economic and market turmoil but firms faced steeper hypothetical losses this year due to riskier portfolios.
The stress tests, mandated under the Dodd-Frank financial services law, were introduced in the aftermath of the 2008 financial crisis. It evaluates banks' capital adequacy, liquidity and risk management practices under adverse hypothetical scenarios, such as a deep recession and/or a sharp decline in asset prices.
Large banks, including JPMorgan & Chase (JPM - Free Report) and Citigroup (C - Free Report) , have been part of this process since the beginning. Banks with assets between $100 billion and $250 billion are tested every alternate year, effective 2019. This year, banks like Ally Financial, Citizens Financial Group and Fifth Third Bancorp are also part of the annual exercise.
The tested banks registered overall losses of 17.6% to existing loan balances on credit cards, and among them, Goldman recorded 25.4% in losses. GS had one of the biggest increases in SCB at 94 basis points.
JPM’s SCB requirement is 12.3% while C have to maintain an SCB of 12.1%.
Goldman Latest SCB Requirement
The central bank lowered the extra capital level requirement of Goldman Sachs. The bank now must hold a ‘stress capital buffer’ of 6.2%, down from the 6.4% suggested initially in the test.
With this, GS will be required to hold common equity equal to 13.7% of its risk-weighted assets (RWA), instead of the 13.9% the Fed initially advised.
Lower SCB Level to Aid Goldman’s Capital Distribution
Goldman rewards its shareholders handsomely. In July 2024, the company’s board of directors approved a 9.1% increase in the common stock dividend to $3 per share starting from third-quarter 2024. In the past five years, the company hiked dividends five times with an annualized growth rate of 24.42%. Currently, its payout ratio sits at 35% of earnings.
GS has a share repurchase program in place as well. In February 2023, it announced a share repurchase program, authorizing repurchases of up to $30 billion of common stock with no expiration date. As of Jun. 30, 2024, $19.2 million worth of shares remained available under the program. At that time, management stated that given the higher-than-expected stress capital buffer (SCB) requirement, the company plans moderate buybacks versus second-quarter levels.
We believe as GS’ capital requirement reduces, the bank can utilize this to increase capital distributions and buyback plans. Given its decent liquidity, such capital distribution activities seem sustainable. This is likely to stoke investors’ confidence in the stock.
Thus, it likley will help Goldman to witness more upward trend in its stock prices in the coming months.
In the past three months, GS’ shares have gained 11.8% compared with the industry’s growth of 1.6%.
Goldman currently carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.