Shares of major U.S. banks rose on Friday following they passed the Federal Reserve’s annual health check, but Bank of America (BAC-US) underperformed, with tests showing the bank had a larger-than-expected capital buffer, which might limit its ability to execute treasury shares and pay dividends.
While U.S. stocks rose broadly on Friday, Wells Fargo (WFC-US) with a 7.5% gain was still quite impressive, the biggest gainer among the 34 banks subject to the Fed’s stress test.
Stress tests are used to measure the performance of the tested banks in a hypothetical severe recession. Tests showed that the group had regarding twice as much capital as the Fed would require in a downturn.
“The overall picture is that banks are well-capitalized to weather a downturn,” said David Konrad, an analyst at Keefe, Bruyette & Woods (KBW-US).
However, the results show that banks vary widely in the size of their stressed capital buffer (SCB) — the extra layer of capital that banks must hold to cover potential losses and support the Fed’s day-to-day operations in the coming weeks.
Banks expected to have to raise stressed capital buffers include Bank of America, Citi (C-US) and JPMorgan (JPM-US)。
Morgan Stanley (MS-US) analyst Betsy Graseck said Bank of America, Citi and JPMorgan may need to keep their dividends flat and cut their executive treasury shares.
Graseck said the changes might reduce BofA’s EPS by 1-2%, so she lowered her price target on BofA to $47 from $49. She estimates Citi’s EPS will fall 1-5% on the change, and she lowered her price target to $57 from $60. JPMorgan’s EPS estimate is down 1-2%, and she lowered her price target to $149 from $152.
KBW’s Konrad also estimates that the three banks will have to significantly reduce the size of their executive treasury shares.
He believes that following adjusting for treasury stocks, BofA’s EPS will fall by 5%, while JPMorgan Chase and Citigroup’s EPS will fall by regarding 2%.
Wells Fargo’s stressed capital buffer is expected to be nearly the same as last year, Konrad noted.
The U.S. divisions of foreign banks performed well, boosting their share prices, with UBS and Credit Suisse rising 6% and 5.5%, respectively. Other strong performers included Ally Financial (ALLY-US), up 5.0 percent, and Discover Financial Services (DFS-US), up 5.4%.
