Wall Street banks are making rain for their shareholders. Dividend payouts by the country’s biggest lenders are set to rise by an extra $2bn next quarter after the Federal Reserve gave them a clean bill of health following annual stress tests last week. Billions more could follow in the form of share buybacks.

Investors will welcome the redistributions — particularly those who stuck with bank stocks during the pandemic last year. But with the KBW Bank index up more than 70 per cent over the past 12 months and shares in Morgan Stanley, Goldman Sachs and JPMorgan all trading at or near record highs, the risk is that this is as good as it gets.

The equity and fixed income trading bonanza that helped Wall Street generate bumper profits last year is running out of steam. Loan growth is muted. Bank bosses — including Jamie Dimon — have already started dialling back investors’ expectations ahead of second-quarter earnings next month.

Investors should stick around. Short-term, investment banking revenues will continue to impress. While the pace of Spac deals and merger and acquisition activity may have slowed quarter-on-quarter in the second quarter, it remains up year-on-year. The market for initial public offerings shows no sign of losing its sizzle. Companies have raised more than $71bn since the start of the year, a record for the period according to Refinitiv.

The release of more loan-loss reserves will buoy earnings growth momentum. So too will the coming wave of share buybacks, which flatter earnings per share by reducing the outstanding share count.

Banks still have room to increase profitability longer term. Here the lever will come from traditional banking — which was crushed by low interest rates and the pandemic last year. Net interest income at the six largest US retail lenders fell 10 per cent year on year during the first quarter, the biggest drop in a century, according to Wells Fargo. As interest rates creep up and loan growth recovers, earnings from that source will grow. Keeping the faith should pay off for US bank bulls.

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