Banking
Banks rally after stress test, Bank of America underperforms
Global Banking & Finance Review®
Company
By Sinéad Carew
(Reuters) -Shares in some of the biggest U.S. banks rallied on Friday after they passed the Federal Reserve’s annual health check, but Bank of America underperformed with test results implying it needs a larger-than-expected capital buffer, which could limit share buybacks and dividends.
While the broader equity market also rallied on Friday, Wells Fargo & Co, up 7.8%, was the biggest gainer among the 34 lenders that underwent the Fed’s so-called stress test, which measures how they would fare in a hypothetical severe economic downturn.
The group would have roughly twice the capital required under Fed rules in the downturn scenario, it said.
“The big picture is that banks are extremely well capitalized and could manage through a downturn,” David Konrad, analyst at Keefe, Bruyette & Woods.
But the results implied a big variation in the size of banks’ stress capital buffers (SCB) – an extra layer of capital banks must hold to cover potential losses and support their daily business which the Fed will set in coming weeks.
Banks expected to have to hike their stress capital buffers were Bank of America Corp, Citigroup Inc and JPMorgan Chase & Co.
Shares in the three banks underperformed on Friday, with Konrad estimating their “buybacks will have to be materially adjusted downward.”
Without specifying a timeframe, he estimated that the buyback adjustments would mean a fall in earnings-per-share of 5% for Bank of America, and 2% for JPMorgan and Citi.
Wells Fargo investors were showing relief as its stress capital buffer is expected to remain almost flat on last year, he said.
Bank of America Corp shares rose 1.4%, Citigroup Inc was up 3.9% and JPMorgan Chase & Co gained 3.0%.
Credit Suisse analyst Susan Roth Katzke said “the magnitude of the SCB increases concentrated in a few” was a negative surprise. She pointed to expected SCB increases for Bank of America, Citi and JPMorgan.
Roth Katzke also pointed to expected SCB increases for Bank of America, Citi and JPMorgan.
“On average, across our banks, higher SCBs translate to less excess capital — less excess, but generally sufficient, if not ample capital,” said the analyst.
The U.S. units of foreign banks performed well.
U.S. shares of UBS Group AG were last up 6.3%, while Credit Suisse rose 5.4%. Other strong performers included Ally Financial up 6.0% and Discover Financial Services shares climbed 5.7%.
(Reporting by Sinéad Carew, Elizabeth Dilts Marshall and Pete Schroeder; editing by Jonathan Oatis, Michelle Price and Richard Chang)
A stress test is an analysis conducted by financial institutions to determine their ability to withstand economic downturns and financial crises by simulating adverse economic conditions.
A capital buffer is an additional layer of capital that banks are required to hold to absorb potential losses and support their daily operations during financial stress.
Share buybacks occur when a company purchases its own shares from the marketplace, reducing the number of outstanding shares and often increasing the value of remaining shares.
Financial stability refers to a condition where the financial system operates effectively, with institutions able to withstand shocks and continue to provide essential services.
A dividend is a payment made by a corporation to its shareholders, typically as a distribution of profits, and can be issued in cash or additional shares.
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