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Wells Fargo is buying back $18 billion of stock.

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Bank stocks are rising in response to news that the U.S.’s biggest lenders are handing cash back to shareholders, but that isn’t the whole story. Changing interest rates have offered an extra lift.

As expected, the major banks are lifting their dividends and scaling up their stock-buyback programs after the results of the latest round of Federal Reserve stress tests cleared the way for an end to pandemic-era limits on returns of capital. According to Goldman Sachs analysts, the new dividends and spending on buybacks are 11% and 22% higher than anticipated, respectively. 

Morgan Stanley (ticker: MS), JPMorgan Chase (JPM), Wells Fargo (WFC),

Bank of America

(BAC), and

Goldman Sachs Group

(GS) are all increasing their quarterly dividend payments by at least 11%.

The SPDR S&P Bank ETF (

KBE

) rose as much as 1% Tuesday, though the gain in the exchange-traded fund later moderated to 0.5%, while the S&P 500 was 0.1% higher. Morgan Stanley was the biggest shiner of the group, up almost 3%.

It and Wells Fargo are doubling their dividends, while Morgan Stanley also announced a $12 billion annual share-repurchase program. The investment bank’s new dividend and buyback exceeded estimates by 77% and 8%, respectively. Wells Fargo said it would buy back $18 billion of stock.

A widening of the gap between yields on short-term and longer-dated Treasury debt is helping the stocks as well. The 10-year Treasury yield rose to 1.5% from 1.47%, while the 2-year yield remained at the 0.25% level its has hovered around since mid June. Banks borrow short-term money to lend for the long term, so a widening spread between short-term and longer-term rates, known as a steepening of the yield curve, boosts profitability.  

The news on returns of capital in the form of dividends and buybacks could fuel additional gains. “We believe that this level of dividend yield could drive increased investment interest from certain income-oriented mutual funds,” Goldman Sachs analyst Richard Ramsden said in a research note. 

Watch the yield curve and the flow of cash to shareholders. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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