Big U.S. Banks' Stress Test Triumphs: A Green Light for Dividends, But Watch CRE and Regulation

The Federal Reserve's 2025 stress test results, released on June 27, confirmed what many had anticipated: major U.S. banks like JPMorgan Chase (JPM), Citigroup (C), and Goldman Sachs (GS) have fortified capital positions that allow them to navigate severe economic shocks. These results not only validate their resilience but also set the stage for dividend hikes and share buybacks. However, the path to sustained payout growth is fraught with risks tied to regulatory overhauls and lingering commercial real estate (CRE) exposure. Below, we analyze which banks are best positioned to thrive—and where caution is warranted.

Stress Test Outcomes: A Strong Foundation for Capital Returns

The 2025 stress tests subjected banks to a “severely adverse” scenario featuring a 10% unemployment peak, a 30% drop in commercial real estate prices, and a 50% plunge in equity markets. Despite these pressures, all three major banks passed with flying colors, maintaining Common Equity Tier 1 (CET1) ratios above 10%—well above the 5% minimum required. Analysts at JPMorgan Securities and Jefferies noted that the Fed's less severe scenarios compared to 2024 likely contributed to smoother results.

The Stress Capital Buffer (SCB) adjustments, which determine the minimum capital banks must hold, saw reductions or stability for major players. While the Fed's methodology remains opaque, analysts like Piper Sandler's Scott Siefers predict SCB requirements for JPM and C to remain flat or decline slightly from 2024 levels (e.g., C's SCB could drop to 3.0% from 3.1%). This contrasts with mid-sized banks like Wells Fargo, which faced unexpected SCB hikes in 2024.

Dividend Growth: A Near-Term Catalyst for Major Banks

With robust capital buffers and lighter SCB constraints, the stage is set for dividend increases and buybacks. JPMorgan, already the largest U.S. bank by assets, could boost its dividend by 5–7%, while Citigroup, with its streamlined operations, may see a low double-digit hike. Goldman Sachs, though more capital-light, could prioritize buybacks over dividends given its focus on wealth management and equity trading.

Investors should note that regulatory clarity is critical. The Fed's proposal to average SCB results over two years (to reduce volatility) could provide smoother capital planning, but its finalization—expected by late 2025—remains uncertain. Meanwhile, the removal of the dividend add-on component from SCB calculations, if approved, would further free up capital for payouts.

Regulatory Risks: A Shadow Over the Horizon

While the Fed's stress tests are a positive signal, regulatory overhauls pose a risk to long-term capital flexibility. Industry groups like SIFMA and BPI have lobbied to revise stress test scenarios to reflect post-2008 reforms (e.g., reduced CRE lending risks) and harmonize with Basel III rules. However, the Fed's reluctance to fully address these concerns could lead to redundant capital requirements, stifling dividend growth.

Another wildcard is the global market shock (GMS) component, which disproportionately impacts trading-heavy banks like Goldman Sachs. While the 2025 GMS scenario—focused on falling equity prices and a stronger dollar—was less severe than prior inflation-driven shocks, future iterations could reintroduce volatility.

CRE Exposure: A Divide Between Big Banks and Regional Peers

The stress test's 30% CRE price decline—milder than the 40% drop in 2024's scenario—signaled the Fed's recognition that CRE risks have partly been priced into markets. Major banks, which have diversified lending portfolios and stricter underwriting since the pandemic, are less exposed than regional lenders.

• JPMorgan's CRE exposure represents ~15% of its loan book, with 60% in high-grade commercial properties.
• Citigroup's CRE portfolio is similarly conservative, with a focus on prime offices and multifamily housing.
• Goldman Sachs, less reliant on lending, faces minimal CRE direct exposure.

In contrast, regional banks like Truist (TRO) and Bank of America (BAC) have higher CRE concentrations in riskier sectors like retail and hotels, leaving them vulnerable to prolonged downturns.

Investment Strategy: Selectivity is Key

Buy the majors, avoid the regionals with CRE overhang.

• Top Picks:
• JPMorgan: Strong capital ratios (CET1 ~12.5%), diversified revenue streams, and a track record of steady dividends.
• Citigroup: Post-restructuring efficiency gains and a dividend yield of ~3.5% (vs. 1.8% for the S&P 500).

• Goldman Sachs: Wealth management dominance and a buyback-heavy capital return strategy.

• Avoid: Regional banks like KeyCorp (KEY) and Zions Bancorp (ZION), which have >20% CRE exposure and weaker capital buffers.

Actionable Advice:
- Initiate positions in JPM and C at current valuations (~1.2x book value), aiming for a 5–7% dividend yield in 12 months.
- Avoid overpaying for GS, as its equity trading volatility could pressure earnings.
- Monitor Fed policy: A final rule on SCB averaging by Q4 2025 will clarify capital return paths.

Conclusion

The 2025 stress tests underscore that JPMorgan, Citigroup, and Goldman Sachs are financial titans capable of weathering storms. Their strong capital positions and reduced SCB burdens position them to reward shareholders handsomely. However, investors must remain vigilant: regulatory headwinds and CRE risks among smaller banks could disrupt the sector. For now, the majors are the safest bets—provided you avoid getting swept up in regional bank optimism.

Stay diversified, but tilt toward resilience.