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J.P. Morgan Chase & Co. Bank of America Corp. and Goldman Sachs Group Inc. reduced their capital buffers and will have some near-term capital flexibility after the Federal Reserve’s bank stress test results, published late Wednesday, Citi analyst Keith Horowitz said as part of a flurry of mostly upbeat analyst comments Thursday on the Fed’s annual review of bank strength.
Overall, the stress test results “came in better than expected, with stress capital buffers coming down or staying flat for most banks in our coverage,” Horowitz said.
Most bank stocks moved up on Thursday. The KBW Nasdaq Bank Index
BKX,
was up 1.3%, the SPDR S&P Bank exchange-traded fund
KBE,
was ahead by 1.6%, the Financial Select SPDR ETF
XLF,
was up by 1%, and the SPDR S&P Regional Banking ETF was up by 1.6%.
Other analysts mostly echoed his view and said it’s unlikely banks will make any major positive moves on stock buybacks and dividends for investors because of an uncertain regulatory environment following the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year.
JPMorgan
JPM,
Bank of America
BAC,
and Goldman Sachs
GS,
“were the biggest winners” with a 1% reduction in their stress capital buffers, while Citizens Financial Group Inc.
CFG,
and Truist Financial Corp.
TFC,
reported “surprise” increases in their stress capital buffers of 0.7% and 0.4% respectively, but both banks remained more than 1% above their implied minimums, Horowitz said.
“Although we expect the stocks to react positively on the downward revisions as the lower stress capital buffers (SCBs) provide near-term flexibility and could see some modest dividend increases, we do not expect to see major changes to capital return outlook as many banks await further clarity on regulatory reform with Basel III endgame,” Horowitz said.
JPMorgan Chase was up by 3%, Bank of America was up by 3.1%, Goldman Sachs was up by 2.8%, Citizens Financial was up by 0.9% and Truist was up by 1.1%.
Citigroup
C,
was down by 1.1% and Wells Fargo & Co.
WFC,
was up by 3.6%, while Morgan Stanley
MS,
was rising by 2.1%.
J.P. Morgan analyst Vivek Juneja on Thursday lowered his rating on Citizens Financial Group Inc. to neutral from overweight after the Fed’s annual bank stress test results. He kept the price target for the stock at $27 a share.
Relative to its banking peers, Citizens will see its capital requirement increase, “which will further pressure profitability” at the bank, Juneja said.
Citizens has a lower cushion relative to peers above minimum tier-one capital requirements based on its capital levels on March 31 and has continued to buy back stock in the second quarter.
“Citizens is being pressured by high losses on its commercial real estate (CRE) loans due to high level of maturities of office CRE loans in 2023 and 2024,” Juneja said.
Jefferies analyst Ken Usdin said Capital One Financial Corp.
COF,
could see its tier-one capital requirement increase the most from the 23 banks in the stress test. Citizens Bank, Truist Financial
TFC,
and Citigroup tier one capital requirements may also increase, while Bank of America, JPMorgan Wells Fargo, Goldman Sachs and Morgan Stanley as well as M&T Bank
MTB,
and PNC Financial Services Group Inc.
PNC,
look better than they did a year ago.
Oppenheimer analyst Chris Kotowski said the stress tests have become “arbitrary and capricious” and cited a few examples.
“Why are JPM’s C&I losses projected at 10.0% and Citi only 4.6% and Deutsche at
2.5%? Why are Citi’s home equity losses at 19.1% and BAC at 4.0%? Why does
Goldman, who lends mainly to millionaires and billionaires, lose 3.7% on its first-lien
mortgages but COF with its healthy amount of subprime only 3.2%? Very curious,
no?,” Kotowski said.
John Sedunov, finance professor at Villanova University School of Business, said the stress tests as well as the flight of deposits from regional banks to larger banks during the bank failures earlier this year reinforce the theme of bigger is better in the business.
“For larger regionals, they certainly have been given an incentive to be as big as possible,” Sedunov told MarketWatch. “Maybe they’ll reserve their cash and capital to think about buying somebody.”
Overall, the results were encouraging, with the banks subjected to stresses related to unemployment, recession, commercial real estate vacancies, and a study on the affects of interest rates hikes on the eight largest banks.
“I’m hopeful that the Fed got the various scenarios more correct this time around,” he said.
Also Read: Fed official eyes ‘reverse stress tests’ for banks as results awaited after 2023 bank failures
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