Bank of America Corp. and JPMorgan Chase & Co. emerged with the lowest marks among the overall passing grade for banks in the Fed’s annual stress test, analysts at Jefferies and Citigroup said Friday.
Also weighing in on the stress test, Morgan Stanley analyst Betsy Graseck cut her price targets for Bank of America Corp. BAC,
Citigroup Inc. C,
and JPMorgan Chase JPM,
saying the results suggest that the three banks will need to keep dividends flat, as well as eliminate buybacks and reduce their risk-weighted assets to generate a common equity tier one ratio above their new required minimums.
These and other banks will be cleared to start sharing their plans for returning capital to shareholders on Monday after the stock market closes.
Breaking down the annual US Federal Reserves stress test released Thursday, Jefferies analyst Ken Usdin said the results “were tough” on Bank of America, Citigroup and JPMorgan Chase and four regional banks: Capital One Financial Corp. COF,
Huntington Bancshares Inc. HBAN,
PNC Financial Services Group Inc. PNC,
and “especially” M&T Bank Corp. MTB,
“Excess capital is more scarce, with rising unrealized losses and risk-weighted assets growth poised to keep capital return programs in check relative to years, especially for the global systemically important banks,” Usdin said. “All things considered, we expect banks to continue to lower their capital return expectations — many already have.”
The “relative winners” of the stress tests include Goldman Sachs Group Inc. GS,
Morgan Stanley MS,
and Wells Fargo & Co. WFC,
in regard to their stress capital buffer outcomes. Among regional banks, Ally Financial Inc. ALLY,
and Discover Financial Services DFS,
fared better than others, he said.
After moving mostly lower in the previous sessions, shares of bank stocks rose along with the broad market on Friday, with the Financial Select SPDR ETF XLF,
up by 1.5% in morning trading Friday, the KBW Bank Index BKX,
gained 3.1% and the S&P 500 index SPX,
Bank of America was up 0.8%, while JPMorgan Chase rose 2.5% and Citigroup climbed 3.2%. Goldman Sachs shares rally 4.9%, Wells Fargo advanced by 7.3% and Morgan Stanley moved up by 5.6%.
Coming to some of the same conclusions as Usdin, Citigroup analyst Keith Horowitz said Bank of America marked the “most disappointing” results in the stress test, with an estimated increase of 90 basis points (0.9 percentage points) in its stress capital buffer, following by JPMorgan Chase with an 80 basis increase in its stress capital buffer.
“Buybacks are likely on hold for BAC and JPM until 1Q23,” Horowitz said. “There were no clear winners, in our view, just more results that were in line with prior expectations.”
While M&T Bank had a very large increase of 220 basis points in its stress capital buffer, Horowitz said the result will have no impact on near-term or longer-term buybacks and earnings per share estimates.
Morgan Stanley’s Graseck said Goldman Sachs generated the biggest positive surprise among the money center banks, with stress capital buffers coming down by 10 basis points, even with a more challenging global growth outlook and corporate credit outlook.
Graseck said Goldman’s improvement reflects growth in its consumer banking business and net interest income and an improvement in assets.
She cut her price target for Bank of America to $47 a share from $49, lowered each price target for Citi to $57 from $60 and reduced JPMorgan Chase’s price target to $149 from $152.
Outside of Wall Street, the stress tests generated criticism of the Fed from Better Markets, a nonprofit group focused on financial reforms for giving all banks a passing grade.
“Despite a heightened, near-unprecedented combination of simultaneous shocks and risks to the economy and the financial system — from a pandemic and war to skyrocketing inflation and speculative financial bubbles — that are lowering the living standards of most Americans, the Federal Reserve’s stress tests continue to be too stress-less,” Phillip Basil, director of banking policy for Better Markets, said in a prepared statement. “When all too-big-to-fail banks pass comfortably year-after-year, the tests clearly don’t actually stress or test the banks.”