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The banking sector seems to be booming lately. The rise in interest rates translates into better profit margins, the tax reform allows banks to retain a larger share of their revenues and the strength of the US economy keeps demand for banking products high and low payment defaults.
The Federal Reserve does not authorize the giants of the investment bank Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) to increase their capital returns for shareholders. 2018, especially as most of the other major banks realize strong dividend increases and buy back billions of dollars in shares. Before you begin to worry, however, here is an overview of why this is happening and why investors should not worry.
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Goldman Sachs and Morgan Stanley will not increase their return on capital this year
When Goldman Sachs and Morgan Stanley decided how much they wanted to pay in dividends and how much they would like to spend on redemptions in the next year he pushed their capital levels a bit too low.
Banks have therefore submitted reduced investment plans to the Federal Reserve as part of this year's stress tests, which essentially leave the total return on capital unchanged.
Goldman Sachs Plan Expects a Return From While the plan provides for a quarterly dividend increase of $ 0.05, it will not come into effect until the second quarter of 2019. Morgan Stanley plans to make 6, $ 8 billion to shareholders over the next year but expects an immediate investment of $ 0.05 quarterly dividend increase (in the third quarter of 2018) to $ 0.30 per share
Both plans Capital expenditures are consistent with those of last year, in terms of overall amounts that can be returned. As there is an increase in dividends in both plans, this means that redemptions will be slightly lower.
It's Not a Business
Previous Years When Banks Were Not Allowed to Increase Returns, Although Regulators Did Determine Goldman Sachs Capital Levels and Morgan Stanley – in particular, Level 1 leverage and additional leverage ratios – would be lower than the minimum requirements in a severe crisis. global slowdown, this is not necessarily because of reprehensible act, excessive risk taking or mismanagement by both banks. In fact, both banks are doing very well.
Instead, the question of Goldman and Morgan Stanley relates to tax reform. In Goldman's case, the "deemed repatriation" of foreign profits mostly caused a loss of $ 5 billion and Morgan Stanley suffered a $ 1.4 billion "loss" due to the decline in the value of its assets. deferred tax assets. does it mean for investors?
To be clear, it's certainly a disappointment for investors. With tax reform, rising interest rates and the strong US economy pushing bank profits up, it is fair to say that many investors were hoping for higher dividends and more buyouts .
a factor that will end up being a good thing for both banks: tax reform. While it may take a little longer for shareholders to expect a higher dividend increase or buybacks, there is no reason not to believe that these two banks have good futures.
Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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