Goldman Shareholders’ Hope for Bigger Payout Dashed by Fed

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Goldman Sachs headquarters in New York.

Goldman Sachs headquarters in New York.

Photographer: Spencer Platt/Getty Images

Goldman Sachs Group Inc.’s cushion of extra capital in the latest Federal Reserve stress test isn’t enough for the firm to match last year’s payout of dividends and share repurchases.

The Fed projected Thursday that Goldman Sachs’s total risk-based capital ratio would fall to 8.1 percent in a severe economic downturn, weaker than what the central bank estimated in last year’s test and barely above the 8 percent minimum. The figure was below Goldman Sachs’s own calculation of 13 percent, as well as those of analysts including Credit Suisse Group AG’s Susan Roth Katzke, who estimated 11.3 percent.

Goldman Sachs’s narrow buffer in the Fed’s eyes would leave the New York-based firm with less than $1 billion in excess capital to pay out to shareholders beyond the dividends the firm has been disbursing. That’s dwarfed by the $5.47 billion it returned through buybacks in 2014, and the $6.5 billion that Katzke estimated the bank would return over the next five quarters.

“We remain cautious on Goldman Sachs” as is seeks approval for its capital plan, Keefe, Bruyette & Woods Inc. analysts led by Brian Kleinhanzl said in a report Friday. “The narrow buffer over minimum requirements increases the possibility share repurchase announcements come in below our expectations.”

‘More Punitive’

The firm could boost its buffer over the minimum ratio by issuing preferred shares, which may allow it to return more capital than the test results would indicate, Kleinhanzl wrote. Goldman Sachs’s lowest ratio probably occurred early in the testing period before recovering, meaning the firm could structure its capital plan to increase buybacks in later quarters, Matt O’Connor, an analyst at Deutsche Bank AG, said in a note.

Goldman Sachs slipped 0.9 percent to $188.29 at 12:13 p.m. in New York, extending its decline for the year to 2.8 percent.

The Fed test was tougher than many analysts anticipated for firms most reliant on investment banking and trading. Goldman Sachs, Morgan Stanley, and JPMorgan Chase & Co. all fell closer to the minimum than Katzke predicted on at least one measure and appear to lack room to match the payouts she estimated they would request.

“The tests are set up with the contemplation of which businesses may have more risk than others, and it’s clear from the results that the test is more punitive to businesses with bigger trading platforms than others,” said Devin Ryan, an analyst at JMP Group Inc.

Changes Allowed

David Wells, a spokesman for Goldman Sachs, declined to comment on the test results or the company’s plans.

The bank, which currently pays a 60-cent quarterly dividend, released its own estimates late Thursday in New York. The gap in the total risk-based capital ratio occurred as the Fed assumed lower capital levels and higher risk-weighted assets than the company did. The firm’s projections for other key capital measures also exceeded the Fed’s.

The test results released for banks Thursday show whether they have enough capital to withstand nine quarters of stressful economic conditions. The second round, to be announced March 11, assesses their ability to weather losses and still pay dividends, buy back stock or make acquisitions.

Banks submitted those capital plans to the Fed by January, and are allowed to modify their designs in the week before the central bank releases its rulings. Firms can ask for permission to return capital through buybacks and dividends or lay out plans to raise equity.

Banks’ Optimism

Banks model their losses and capital ratios using the scenario developed by the Fed. While commercial banks such as Citigroup Inc. and Wells Fargo & Co. had a larger buffer than Goldman Sachs in the stress test, the excess was less than the lenders’ own estimates.

Citigroup’s estimate of how it fared under the severely adverse scenario showed a minimum Tier 1 leverage ratio of 6 percent, compared with the Fed’s 4.6 percent. The firm’s common equity Tier 1 ratio of 8.2 percent was more generous than the Fed’s 6.8 percent. Portales Partners downgraded the New York-based bank to underperform Friday, saying its weaker-than-expected capital ratios reduce how much Citigroup can pay in dividends and buybacks.

Wells Fargo’s 8.9 percent leverage ratio compared with the Fed’s 6.4 percent, while it’s common equity Tier 1 ratio of 9.1 percent compared with regulators’ 6.9 percent.

JPMorgan and Bank of America Corp., the nation’s largest lenders, also were more optimistic than the Fed in the severely adverse scenario. JPMorgan projected a minimum Tier 1 leverage ratio of 6 percent, compared with the Fed’s 4.6 percent. The firm’s common equity Tier 1 ratio of 6.9 percent was more generous than the Fed’s 6.3 percent.

Bank of America estimated minimum Tier 1 leverage ratio of 5.9 percent, compared with the Fed’s 5.1 percent. The firm’s common equity Tier 1 ratio of 7.8 percent was higher than the Fed’s 7.1 percent.

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