(Reuters) - The majority of the largest banks will continue to have enough capital to satisfy regulators, even if they suffer a financial shock that includes unemployment hitting 13 percent and a 21 percent drop in housing prices, the Federal Reserve said on Tuesday.
* The Fed, in releasing its annual stress test results two days early, said 15 of the 19 largest U.S. banks would have satisfactory capital buffers
* The regulator said Citigroup, Ally Financial and SunTrust banks fared worst under the supervisory stress ratios, with Tier 1 common capital ratios of 4.9 percent, 4.4 percent, and 4.8 percent, respectively.
* The bank holding companies that came out on top were Bank of New York Mellon with a Tier 1 common capital ratio of 13.1 percent under the hypothetical financial shock, State Street Corp with 12.5 percent and American Express with 10.8 percent.
* Bank of America came in with 6.2 percent, and JPMorgan’s result was 5.9 percent.
PAUL MILLER, ANALYST, FBR CAPITAL MARKETS, ARLINGTON, VIRGINIA
“It was very surprising that JP Morgan can pretty much do what it wants while some of the other guys fail.”
“We were worried about anybody that was not making a lot of money, and this takes away a lot of any upside potential for SunTrust and Citi.”
Miller, who has a “market perform” rating on SunTrust and does not follow Citigroup, said the Atlanta-based bank would have done much better if it hadn’t requested a stock buyback.
“They technically didn’t fail, but the negativity is bad,” he said. “From here on in, if you don’t earn it you can’t pay it.”
STEPHEN WOOD, CHIEF MARKET STRATEGIST, RUSSELL INVESTMENTS, NEW YORK
“American banks are healthier and have ample capital when compared with their European counterparts. They are in better conditions than where they were four years ago. The bigger issue is how insulated American banks are to the European situation.
Does this build confidence? Transparency generally builds confidence. We think this is a positive in a sense that it allows investors to assess risks better and allow for higher quality forecasts.”
DAVID DIETZE, CHIEF INVESTMENT STRATEGIST, POINT VIEW WEALTH MANAGEMENT, SUMMIT, NEW JERSEY:
“The best part is that we are past it now, instead of all eyes being on one particular metric which reflects a snapshot of where things were when the Fed made this investigation. It is designed to look at performance under very low probability scenarios, as opposed to what is going to happen in the most likely scenarios. There is some sigh of relief that we are past that.
The skeptical view was that the Fed doesn’t engage in a test if they don’t ultimately think it is going to be passable by everyone, and here we are seeing four of the 19 banks are said to have insufficient capital to buy back stock, to pay dividends under these worst-case scenarios. I think that took some traders by surprise, and they were not unknown institutions.
ANTON SCHUTZ, FINANCIAL SERVICES MUTUAL FUND MANAGER, MENDON CAPITAL, ROCHESTER, NEW YORK
“The test wasn’t designed to create failures but to promote confidence in the system and to help the stronger guys to return capital.”
On likely market reaction:
“Nobody expected Bank of America to return capital, so there shouldn’t be any reaction in the stock price. No one expected Morgan Stanley to return capital, because they’re focused on purchasing more of the Smith Barney JV from Citigroup. If you’ve been paying attention there’s no reason shares should react.”
Will the test results form a watershed for bank stocks?
“This helps clarify things, and will make the sector easier to swallow for generalist fund managers who are underweighting financials. Banks getting the Fed’s blessing may give investors the ‘All Clear’ sign.”
CHARLIE SMITH, CHIEF INVESTMENT OFFICER OF FORT PITT CAPITAL GROUP, WITH $1.2 BILLION ASSETS UNDER MANAGEMENT:
“The capital plans for the top banks in terms of their ability to continue to pay their current dividend rates were never in question. The issue was whether Bank of America or Morgan Stanley, which were considered to be weaker, would be able to raise them. It looks like they won’t be able to, so it kind of separates the weaker ones from the stronger.”
“The initial reaction in the market is rather limited, but I think it is pretty negative that you had four banks fail. Citi and a few of the larger ones - it doesn’t bode well for the banking sector. It indicates that the Federal Reserve decided to release this on a day when we had such a nice rally in stocks because the rally would cushion any effects coming out of this. Citigroup is the highest profile failure, and it’s bad — it’s not horrendous — but I think it will take some of the wind out of the market’s rally here.
TIM GHRISKEY, CHIEF INVESTMENT OFFICER, SOLARIS CAPITAL MANAGEMENT, BEDFORD HILLS, NEW YORK:
“JP Morgan was probably one of the easier passes. Arguably this is the best run or one of the best run major banks in the U.S., if not in the world, and the fact that they are increasing the dividend 20 percent and repurchasing shares at these levels is a real vote of confidence by management and by the Fed that this is a rock solid company.”
KEITH DAVIS, BANK ANALYST AND PRINCIPAL AT MONEY MANAGER FARR, MILLER & WASHINGTON, WASHINGTON, DC:
“There’s so much more credibility when you actually have some of these banks fail the stress tests. When you actually have banks submitting capital plans and requests to return capital, and it’s denied, I think that says a lot about ... how aggressive (the Fed) is being in terms of assumptions. All these banks have been trading in anticipation of dividend increases, which is a little bit strange.”
SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR & ASSOCIATES, TORONTO:
“In aggregate the Fed still sees the U.S. banking sector as somewhat fragile. I think the bank strategy now is the stronger ones are trying to get distance between themselves and some of their competitors. I think the environment is quite difficult for the banks, and I think the stronger banks are going to use this (stress test) to pick up business from their competitors.”
Americas Economics and Markets Desk; +1-646 223-6300