Banks Lift Payouts Amid Successful Stress Test: ETFs in Focus

America's top banks announced plans to raise their third-quarter dividends following successful results from the Federal Reserve’s latest annual stress test. The results indicate that the banks have sufficient capital to weather severe economic disruptions, including recession, high unemployment, and market instability.

JPMorgan Leads the Pack With Dividend Hike and Major Buyback

JPMorgan Chase, the largest U.S. bank, disclosed in a regulatory filing that it will increase its dividend to $1.50 per share, up from $1.40. In addition, the bank unveiled a new $50 billion share repurchase program, effective immediately, with no set end date.

JPMorgan CEO Jamie Dimon stated that the share buyback gives the bank flexibility to return capital “as we see fit,” reinforcing confidence in the financial system’s resilience.

Other Major Banks Announce Dividend Increases

Other banking giants followed suit with their own dividend hikes:

• Bank of America plans to increase its dividend by 8%, raising it to 28 cents per share.
• Wells Fargo will lift its dividend to 45 cents, up from 40 cents.
• Morgan Stanley will raise its dividend to $1 per share and has approved a $20 billion share buyback with no fixed duration.
• Goldman Sachs will boost its dividend to $4 compared to the previous $3.
• Citigroup will increase its payout to 60 cents per share from 56 cents.

Strong Capital Positions Across the Sector

According to the Fed’s 2025 stress test, banks on average maintained a Common Equity Tier 1 (CET1) capital ratio of 11.6%, well above the regulatory minimum of 4.5%. The six largest banks in the country all showed double-digit capital ratios, reflecting their ability to endure financial shocks.

Fed Eyes Changes to Stress Test Framework

The Federal Reserve is currently working on changes to its stress testing methodology. In a proposal released in April, the central bank suggested averaging stress test results over two years, a move aimed at reducing outcome volatility and increasing predictability.

Higher Capital Requirements Possible Under New Model

Although the rule-making process is still in progress, the Fed said that if the results from 2024 and 2025 had been averaged, banks would have needed to hold more capital to satisfy the regulatory thresholds.

ETFs in Focus

Against this backdrop, financials-based exchange-traded funds (ETFs), such as Financial Select Sector SPDR Fund XLF, Vanguard Financials ETF VFH and Invesco KBW Bank ETF KBWB, should gain ahead.

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This article originally published on Zacks Investment Research (zacks.com).

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