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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 forecast and the lender's own risk managers in an extreme downturn.
The Fed projected that BofA would actually do better than the bank's own models suggested, losing less money and maintaining a higher capital ratio.
But the discrepancy prompted BofA to delay an announcement scheduled for Friday night detailing its dividend and capital requirements, according to a person familiar with the matter.
The bank was expected to tell investors it was increasing its dividend. However, the lack of an announcement was conspicuous by the fact that it did not materialize as all other major US banks updated investors on Friday of their plans.
“That's strange,” said Gerard Cassidy, banking analyst at RBC Capital Markets. “It is not normal.”
The Fed released the results of its annual bank stress tests last week. The tests, introduced after the 2008 financial crisis, are closely watched by investors as they are used by regulators to determine how much capital banks need to hold for the next 12 months.
As long as banks meet or exceed the requirements, they are not subject to Fed restrictions on how much earnings they can return to shareholders via dividends and share buybacks.
BofA released a statement Monday saying it had contacted the central bank to find out why the regulator's findings differed from its own.
BofA declined further comment.
The company's internal stress test showed that it would lose $52 billion in a severe economic downturn and that its capital to total assets ratio would fall to a maximum of 8.3 percent, the bank told investors on Monday. However, the Fed estimated that BofA would lose just $23 billion and that its capital ratio would fall to 10.6 percent.
Goldman Sachs also beat its own estimates, forecasting that its capital ratio would fall to a low of 9.5 percent in a severe recession, compared to 10.1 percent forecast by the Fed. The results of JPMorgan's and Morgan Stanley's internal stress tests were in line with central bank estimates.
The Fed forecast that Citigroup's capital ratio would fall to 9.1 percent, worse than the bank's own estimate of 10.6 percent. Citi said on Friday it was disappointed with the results of its stress test but still increased its dividend. Wells Fargo has not yet released the results of its internal testing.
Scott Siefers, banking analyst at Piper Sandler, said the main reason for BofA's discrepancy is large unrealized losses on its bond portfolio, which have skyrocketed due to rising interest rates.
This year's stress test included a scenario in which interest rates fell to near zero from their recent highs. The Fed said BofA would post a $22 billion gain from the hypothetical rate decline. BofA, which has claimed unrealized losses are not a problem, said a theoretical drop in interest 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 sharp rise in interest rates, BofA would have fared significantly worse.
BofA shares rose 1.8 percent on Monday, in line with the competition. Siefers and other analysts said they still expect the company to announce a dividend increase soon, despite the delay.
“We appreciate that BofA is transparent in their efforts to understand the situation. . . Difference between their own test and the Fed's,” Siefers said in a note to clients. “The bottom line is that the results of the BofA are a bit more uncertain than we would like, but hopefully nothing will change in the end result.”