Bank of America, Citigroup, JPMorgan screen poorly in Fed's 2022 stress test

Jun. 24, 2022 9:19 AM ETJPMorgan Chase & Co. (JPM), C, BACSTT, MTB, HBAN, COF, PNC, GS, MS, WFC, ALLY, DFSBy: Liz Kiesche, SA News Editor116 Comments

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As a result of this year's DFAST (Dodd-Frank Act Stress Test), Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM) may have to raise their internal target ratios and hold off on stock buybacks to increase their Common Equity Tier 1 ratios, analysts said.

While some banks fared better than others, all 34 banks that were subject to the stress tests passed, the Federal Reserve said after the close on Thursday. After Monday's market close, banks will announce their dividend and stock repurchase plans for Q3 2022 through Q2 2023.

"All in, while most of the regionals, trust banks and even brokers were fine enough, 2022 results were a little tougher on the universal banks and card companies than we expected," Evercore ISI analyst Glenn Schorr wrote in a note to clients.

Jefferies analyst Ken Usdin summed up the DFAST results: "Excess capital is more scarce, with rising unrealized losses and RWA (risk-weighted assets) growth poised to keep capital programs in check relative to prior years, especially for the G-SIBs (global systemically important banks)."

Citi (C) appeared "to be the tightest capital position and should reduce buyback expectations and build some capital," Evercore's Schorr said. "Every other bank appears to be able to execute on the Street's expected capital payouts, though our gut is several will slow their buyback roll given the looming economic backdrop."

He puts JPMorgan Chase (JPM) on that list and perhaps Bank of America (BAC). State Street (STT) screened well, he added, pointing to its high excess capital and a 180 basis point higher stressed CET1 ratio, while many other companies' declined.

Morgan Stanley's Betsy Graseck said the banks' new stressed capital buffer suggests that BofA (BAC), Citi (C), and JPMorgan (JPM) will have to keep dividends unchanged, eliminate buybacks, and cut risk-weighted assets to generate a CET1 ratio above their new required minimums.

The biggest increase in estimated SCB was at M&T Bank (MTB) — to 5.0% from 2.5%, Morgan Stanley's Graseck said. Still, she's keeping capital return assumptions unchanged for the bank, "Our CET1 estimates for MTB remain comfortably above their new implied required minimum for the next several quarters," she wrote in a note to clients.

Jefferies' Usdin also noted that M&T Bank (MTB) screened poorly as well as the three universal banks — Bank of America (BAC), Citi (C), and JPMorgan (JPM). Huntington Bancshares (HBAN), Capital One Financial (COF), and PNC Financial (PNC) screened "modestly worse."

Meanwhile, Goldman Sachs (GS), Morgan Stanley (MS), and Wells Fargo (WFC) were "relative winners in the SCB outcomes," he said

For positive surprises, Graseck pointed to Goldman Sachs (GS), Ally Financial (ALLY), and Discover Financial (DFS). For Goldman, its estimated SCB fell by 10 basis points, likely helped by the growth of its consumer business. She estimated that ALLY's and DFS's estimated SCBs should fall 100 bps each to the 2.5% floor on improvements in provision/assets.

Wolfe Research expects that Street estimates for stock buybacks are too high across most G-SIBs, with the greater capital shortfalls at Citi (C), Bank of America (BAC), and JPMorgan (JPM), and much lower shortfalls at Morgan Stanley (MS) and Goldman Sachs (GS), Steven Chubak wrote in a note.

Oppenheimer analyst Chris Kotowski, though, doubts that the DFAST results will have much impact on banks' capital return plans. Rather, he points to other cross currents including surging loan growth, AOCI (accumulated other comprehensive income) weighing on capital ratios, and the prospect of a recession.

This year's stress tests posed a bigger economic drop than 2021's, featuring peak unemployment rate of 10%, a 55% plunge in stock prices, and a 40% decline in commercial real estate.

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