Today, the Federal Reserve announced the results of its latest round of bank stress tests under its Comprehensive Capital Analysis and Review program. This was the first time CCRA stress test results were publicly released. The supervisory stress test evaluates the ability of 19 major bank/holding institutions to continue to maintain sufficient capital in a financial/economic doomsday scenario. The Fed pulled out all stops in creating this scenario, which includes "a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices." The scenario also assumed that the 19 banks would be hit with $534 billion of losses in just over two years. The 19 BHCs were required to submit "comprehensive capital plans to the Federal Reserve, describing their strategies for managing their capital over a nine‐quarter planning horizon."
Overall, of the 19 BHCs, 15 passed. The Federal Reserve refrained from specifically mentioning the names of companies that failed/passed in its press release. However, as evidenced through Page 25 of the actual report, SunTrust Banks, Inc. (STI), Metlife Inc. (MET), Citigroup Inc. (C), and Ally Financial Inc. failed. Metlife Inc., although it had a stressed ratio above the 5 percent benchmark established by the Federal Reserve, had another projected regulatory capital ratio (including capital distributions) that fell below regulatory minimum levels at some point over the stress scenario horizon.
Investors and BHCs reacted accordingly; most notably, JPMorgan (JPM) soared 7% after it compounded its passing of the stress test with news of a 20% increase in its dividend payout to $0.30/share and a new $15B share repurchase program. American Express, which went up 2.8%, also announced a $4B stock repurchase program and raised its dividend payout by 11.1% to $0.20/share. Wells Fargo (WFC) soared and nearly doubled its quarterly payout from $0.12 to $0.22. Other BHCs that passed the stress test, such as Bank of America Corp. (BAC), haven't signaled interest in initiating a buyback or dividend increase. Interestingly, Citigroup actually soared 6.3% today even though it failed the stress test.
It should be noted that of the three aforementioned BHCs with the best ratios, American Express is arguably the healthiest. Its latest reported quarter posted an EPS increase of 20% YOY, and the average EPS growth of its last 3 quarters is 18%. American Express also has an impressive 35% 3-Year EPS Growth Rate and 2 consecutive years of EPS growth. Moreover, American Express also has decent profitability: its Annual ROE is 27.9% while its Annual Pre-Tax Margin is 21.5%.
However, American Express does have some sore spots. Its latest sales figures were up only 6% YOY, while its 3-Year Sales Growth Rate is a measly 3%. Moreover, it has significant debt, with its Debt/Equity Ratio hovering at 317%.
The results of the Federal Reserve's CCAR stress test were largely positive and buoyed the stock market to post the best trading day this year with momentum that is "likely to continue," said David Joy, chief market strategist at Ameriprise Financial in Boston. Out of the 19 BHCs examined, the BHCs with the best stressed ratios were American Express, State Street, and Bank of New York Mellon. Out of these three, American Express is the strongest, with healthy financials and impressive growth in key areas such as EPS.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AXP over the next 72 hours.