The Number of U.S. Banks Facing New Stress Tests: 31

By Simeon Hyman | December 7, 2011
  • What's Happening

    What Happened

    The Federal Reserve announced that it will subject 31 big U.S. banks to stress tests early next year to see how they would withstand a deep recession. The results could put the kibosh on any plans to raise dividends. The tests assume an 8 percent drop in GDP, a 21 percent falloff in housing prices over the next two years, an increase in unemployment to 13 percent in 2013 and a drop of more than 50 percent in stock market values. It will be the third -- and toughest -- round of bank stress tests since 2009.

    Photograph by Jay Mallin/Bloomberg News

  • Why It Matters

    Why It Matters

    Any hopes for future increases in bank dividends will likely be dashed by the stress tests. The Fed already rejected MetLife's request to raise its dividend and resume share buybacks this year. Similarly, it blocked Bank of America's dividend-payout plan. To put this in context, the dividend yield on bank stocks is already declining. It stands today at about 75 percent of the yield on the S&P 500 Value Index, a broad benchmark for low-growth companies that pay high dividends. In 2000, its yield ratio was 150 percent.

  • What It Means for Your Portfolio

    What It Means for Your Portfolio

    Like it or not, we may now be in a new, more austere era for bank stocks. Dividend yields on financial stocks doubled from about 1.8 percent in 2000 to 3.6 percent in mid-2007. Then came the financial crisis, and dividend yields remained high, although they were high only because stock prices were falling. Today, the dividend yield of the financial sector is about 2 percent. With the upcoming bank stress tests, investors in bank stocks are unlikely to see dividends continue to rise.

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