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Bank Stress Tests 'Much Bigger Surprise Than Expected,' Will Delay Future Investment Plans: JPMorgan

Published 27/06/2024, 21:38
© Reuters.  Bank Stress Tests \'Much Bigger Surprise Than Expected,\' Will Delay Future Investment Plans: JPMorgan
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Benzinga - by Hayden Buckfire, .

A JPMorgan analyst has reacted to the Federal Reserve’s annual stress test results for U.S. banks, which assess their resilience by estimating losses, revenues, expenses, and capital levels under various economic scenarios. The results were announced on Wednesday.

Key Insights: Analyst Vivek Juneja recapped the stress test for large-cap banks, with the results being a “much bigger surprise than expected.”

The tests returned a substantial increase in stress capital buffers (SCB) at the majority of large-cap banks, leading to a corresponding increase in capital requirements.

“We expect this sharp increase in capital requirements may delay or reduce long term capital return plans. All our banks comfortably exceed their minimum requirements and should benefit from further accretion of OCI losses. However, the money center banks in our universe will now have lower cushion of 1.2-1.4% over minimum requirement in CET1 [Common Equity Tier 1] ratio, with one broker dealer at a much thinner 70bp cushion,” the analyst said.

Winners and Losers: Citigroup Inc (NYSE:C) fared comparatively well, according to Juneja. SCB is likely to decline by 20bp. The Fed’s test skewed toward a harsher U.S. recession, which benefitted banks such as Citi which depend on foreign revenues.

Goldman Sachs Group Inc (NYSE:GS) and Wells Fargo & Co (NYSE:WFC) got the shorter end of the stick. Both had SCBs raised by 90bp each (using consensus dividends, Goldman would have a 100bp raise).

All banks discussed by the analyst are “well above” capital ratios, but several large names had narrow cushions. Bank of America Corp (NYSE:BAC) will have the narrowest cushion of 120bp on its CET1 ratio, per Juneja. Citi and Wells Fargo will have a 140bp each.

USB Downgrade: The analyst downgraded U.S. Bancorp (NYSE:USB) from Overweight to Neutral with a price target of $43.50 following the stress test.

“The sharp increase in capital requirements adds another headwind and would delay capital return plans – we do not see a catalyst medium term. US Bancorp is one of our only banks that has indicated no plans for share buybacks.”

The Market Reacts: Goldman Sachs fell 2.22% to $445.96 on Thursday.

Shares of bank exchange-traded-funds fell following the results. The Financial Select Sector SPDR Fund (NYSE:XLF) was down 0.12% on the day.

Comparatively, regional banks outperformed larger banks. The SPDR S&P Regional Banking ETF (NYSE:KRE) closed 1.06% higher on Thursday.

Read Next:

  • Fed’s 2024 Stress Test Results Worse Than Expected, Says Goldman Analyst: ‘The Market Will View The Results As Disappointing’
Image generated using artificial intelligence via Midjourney.

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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