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Vikrant Sitani, CFA
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Vikrant Sitani, CFA is currently working at well known Financial Services Company. Vikrant holds MBA from Virginia Commonwealth University and is Chartered Accountant from India.
  • Credit Card Companies And Fed's Stress Test 1 comment
    Mar 9, 2013 10:55 AM | about stocks: JPM, AXP, FITB, COF

    Bank balance sheet is very opaque. Banks usually don't disclose on quality of the assets it holds on its balance sheet. If one has to compare the balance sheets of the banks, one can look at the risk weighted assets (RWA) as compared to the total assets (NYSEMKT:TA). Higher RWA to TA implies riskier asset. The problem with RWA is that there is no standard methodology to compute them. Recently ECB stated that there is wide discrepancy as to how bank compute Risk Weight. Jaime Dimon, CEO of JP Morgan suggested that European banks have unfair advantage as in his opinion European banks don't adequately weigh the assets.

    Stress Test gives a perspective on the type of portfolio that banks have. Federal Reserve Bank (FED) has taken the data from all the banks and used a consistent method to compute the losses under stress scenario. While it is quite debatable whether the method used by FED is adequately conservative. Fed has not disclosed the model as to how it has computed the losses for the banks. Therefore the loss estimates are quite different from Bank's own estimate. No matter what Fed used, the method is consistently used across all the banks.

    Fed has disclosed the losses under the most severe scenario and they have published the loss ratios for the 18 banks. Looking at the data below, Capital one (NYSE:COF) and Fifth third bank has the highest loss ratios compared to AMEX of JPM. The portfolio of Capital one is therefore of lower quality as compared to AME X And JPM.

    When valuing banks, COF and Fifth Third should have much higher discount rate as their balance sheet has much higher risk. Whenever the recession hits, the downfall in the earnings for COF will be much more intense as compared to Amex or JPM.

    Stocks: JPM, AXP, FITB, COF
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    Author’s reply » Credit Card Companies and Fed's Stress Test
    10 Mar 2013, 08:58 PM Reply Like
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