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Home / Business / Most banks increase their return on capital – but not Goldman Sachs and Morgan Stanley – The Motley Fool

Most banks increase their return on capital – but not Goldman Sachs and Morgan Stanley – The Motley Fool



The banking industry seems to be in full swing lately. Rising interest rates lead to better profit margins, tax reforms allow banks to retain more of their income, and the strong US economy keeps demand for bank products high and defaults low.

So it may be surprising that the Federal Reserve allowed the investment banking giants Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) not, their return on capital to shareholders for 2018, especially since most other major banks make large dividend increases and buy back billions of dollars in shares. Before you worry, here's an overview of why that is and why investors should not worry.

  Dollar bill with tattered center showing the word dividends below

Source: Getty Images.

Goldman Sachs and Morgan Stanley will not increase their return on investment this year

When Goldman Sachs and Morgan Stanley decided how much dividends they wanted to pay and how much they wanted to spend on the next buybacks year, they squeezed their capital levels not too low.

So, as part of this year's stress tests, the Federal Reserve Banks have submitted reduced capital plans, both leaving the return on investment essentially unchanged.

Goldman Sachs' plan provides for a return of up to $ 6.3 billion for the year, and while the plan envisages a quarterly dividend increase of $ 0.05, it will not enter into force until the second quarter of 2019. Morgan Stanley Plans to Repay $ 6.8 Billion to Shareholders for Next Year, Immediately Plans $ 0.05 Quarterly Dividend Increase (Third-Quarter 2018) to $ 0.30 Per Share

Both capital plans are in line with last year's measured by the total dollar amounts that can be returned. Since there is a dividend increase in both plans, this means that some lower repurchases will take place.

It's not about the business

In earlier years, when banks were not allowed to increase their return on capital, this was usually the case

The regulators have indeed stated that the capital level of Goldman Sachs and Morgan Stanley – in particular Tier 1 leverage and additional leverage ratios – would fall below minimum requirements in the event of a heavy loan The global downturn is not necessarily due to misconduct, excessive risk taking or other mismanagement by the two banks. In fact, both banks are doing quite well.

Goldman and Morgan Stanley are involved in tax reform. In Goldman's case, the "supposed repatriation" of foreign income usually caused a $ 5 billion slump, and Morgan Stanley recorded a "$ 1.4 billion" loss on its balance sheet due to the lower value of its deferred tax credits.

What does that mean? mean for investors?

To be clear, this is certainly a disappointment for investors. With tax reform, rising interest rates and the strong US economy, which is driving bank profits higher and higher, one can say that many investors have hoped for higher dividends and more buybacks.

This is a temporary problem A factor that will ultimately prove to be a good thing for both banks: tax reform. While it may take a little while for shareholders to expect dividend increases or higher buybacks, there is no reason not to believe that both of these banks have bright prospects for the future.

Matthew Frankel has no position in any of these stocks. The Motley Fool has no position in any of these values. The Motley Fool has a disclosure policy.


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