Big Banks Unleash Capital Return Plans After Passing Fed Stress Tests

Wall Street’s biggest banks are opening the capital spigots. After easily passing the Federal Reserve’s 2025 stress test last Friday, many of the country’s leading financial institutions announced hefty dividend hikes and multi-billion-dollar buyback programs, signaling robust capital strength and a more favorable regulatory backdrop. While bank stocks barely budged Tuesday, the broader implications of the test results—combined with banks’ low relative valuations—are likely to reignite investor interest in the sector.

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Capital Return Highlights:

The big winner was Goldman Sachs (GS), which announced a 33% dividend hike, taking its quarterly payout from $3.00 to $4.00 per share. JPMorgan (JPM) followed closely, boosting its dividend to $1.50 and authorizing a $50 billion share buyback—one of the largest capital return plans on record. Morgan Stanley (MS) raised its dividend to $1.00 and announced a $20 billion buyback. Bank of America (BAC) hiked its dividend by 8% to $0.28, and Citigroup (C) lifted its payout by 7% to $0.60.

Wells Fargo (WFC), which benefited from a drop in its stress capital buffer (SCB) to the minimum 2.5%, will raise its dividend by 12.5% to $0.45. State Street (STT) and BNY Mellon (BK) announced respective increases of 10.5% and 12.8%, while PNC (PNC) lifted its dividend by 6.3% to $1.70. Northern Trust (NTRS) and M&T Bank (MTB) also announced dividend hikes of 7% and a pending update, respectively.

While some banks like Truist (TFC) and Schwab (SCHW) opted to maintain existing dividend levels, both firms emphasized strong capital cushions and ample repurchase capacity. Truist, for instance, has $2.8 billion left on a $5 billion buyback authorization.

Stress Test Takeaways:

The 2025 Fed stress test was less severe than last year’s, with the aggregate Tier 1 capital ratio projected to decline just 1.8 percentage points versus 2.8 points in 2024. The test assumed a deep recession, a 33% drop in home prices, and 10% unemployment—but the results suggested that large banks remain well-capitalized and resilient to severe downturns. According to Fed Vice Chair for Supervision Michelle Bowman, the outcome reflected “strong capital levels” and “prudent risk management.”

Analysts at Morgan Stanley and Deutsche Bank noted that the new methodology helped drive lower hypothetical losses. Changes in how private equity exposure was measured and tweaks in loan loss assumptions contributed to better-than-expected results. Goldman Sachs saw the biggest SCB improvement, falling by 300 basis points, while M&T Bank and Wells Fargo saw reductions of 110 and 130 basis points, respectively.

Capital Requirements:

Under current rules, most banks’ stress capital buffers will reset on October 1, 2025. Many institutions, including JPMorgan, Wells Fargo, Bank of America, and PNC, now have SCBs at or near the 2.5% regulatory minimum—freeing up additional capital for shareholder returns. Capital One (COF), with an SCB of 4.5%, remained a high outlier, but still below last year’s 5.5%.

Valuation and Sector Outlook:

Despite strong capital ratios, the bank sector remains one of the cheapest in the S&P 500. Trading at roughly 15x forward earnings—well below the index average—banks are increasingly seen as value plays. With higher interest rates supporting net interest income and recent rotation into value and cyclicals, many analysts believe banks are poised for multiple expansion, especially if regulatory pressures continue to ease.

Still, clouds remain. The Fed is expected to clarify whether future SCBs will be based on a two-year average, a move intended to smooth volatility. Separately, regulators are considering a rollback of the enhanced supplementary leverage ratio (eSLR), which could further reduce capital burdens on the largest firms.

Winners and Watch List:

In addition to Goldman and JPMorgan, Wells Fargo and Bank of America saw particularly strong performance, benefiting from capital buffer relief and market-friendly return plans. M&T Bank’s 110 bps improvement in its SCB and strong CET1 ratio (11.5%) also stood out, albeit with a more modest stock move.

Notably, investor enthusiasm has already been building. GS shares are up over 20% YTD and trade near all-time highs, while JPMorgan and Wells Fargo are both extended after breaking out from technical bases earlier in 2025. The bank rally could gain steam as capital return clarity accelerates and regulation becomes incrementally less punitive.

Bottom Line:

With dividend hikes and buybacks flowing, stress test season has delivered a green light for capital return in the U.S. banking sector. Whether this triggers a broader re-rating remains to be seen, but with valuations low and fundamentals improving, the setup is as attractive as it's been in years. For long-term investors, the “fortress balance sheet” mantra has rarely looked more actionable.