Analysts see lowest grades for Bank of America and JPMorgan in Fed’s stress test

Bank of America Corp. and JPMorgan Chase & Co. emerged with the lowest ratings among banks ’overall approval rating on the Fed’s annual stress test, analysts at Jefferies and Citigroup said Friday.

Also considering the stress test, Morgan Stanley analyst Betsy Graseck lowered its pricing targets for Bank of America Corp. BAC,
+ 0.73%,
Citigroup Inc. C,
+ 3.05%
and JPMorgan Chase JPM,
+ 2.39%,
saying the results suggest the three banks will have to keep dividends flat, as well as eliminate repurchases and reduce their risk-weighted assets to generate a common tier 1 ratio above the required new minimums.

These and other banks will be allowed to begin sharing their capital return plans with shareholders on Monday after the stock market closes.

Breaking down the U.S. Federal Reserve’s annual stress test released Thursday, Jefferies analyst Ken Usdin said the results were “tough” on Bank of America, Citigroup and JPMorgan Chase and four regional banks: Capital One Financial Corp. COF,
+ 6.19%,
Huntington Bancshares Inc. HBAN,
+ 3.02%,
PNC Financial Services Group Inc. PNC,
+ 4.46%
and “especially” M&T Bank Corp. MTB,
+ 4.75%.

“Excess capital is scarcer, with the increase in unrealized losses and the growth of risk-weighted assets ready to keep capital return programs under control relative to previous years, especially for investment banks. ‘global systemic importance,’ Usdin said. “Given that, we expect banks to continue to lower their expectations of return on capital, many have already done so.”

“Relative winners” of stress tests include Goldman Sachs Group Inc. GS,
+ 4.83%,
Morgan Stanley MS,
+ 5.56%
and Wells Fargo & Co. WFC,
+ 7.59%
in terms of the results of your stress capital buffer. Among the regional banks, Ally Financial Inc. ALLY,
+ 5.79%
and Discover Financial Services DFS,
+ 5.63%
it was better than others, he said.

After moving mainly downward in previous sessions, banks ’shares rose along with the broad market on Friday, with the Financial Select SPDR ETF XLF,
+ 3.24%
1.5% on Friday morning trading, the KBW Bank Index BKX,
+ 3.92%
gained 3.1% and the S&P 500 SPX index,
+ 2.25%
2.3% more.

Bank of America was up 0.8%, while JPMorgan Chase was up 2.5% and Citigroup was up 3.2%. Shares of Goldman Sachs were up 4.9%, Wells Fargo was up 7.3% and Morgan Stanley was up 5.6%.

Reaching some of the same conclusions as Usdin, Citigroup analyst Keith Horowitz said Bank of America scored the “most disappointing” results in the stress test, with an estimated 90 basis points increase (0.9). percentage points) on its stress capital cushion, followed by JPMorgan Chase with an increase of 80 bases on its stress capital cushion.

“BAC and JPM repurchases are likely to be on hold until 1Q23,” Horowitz said. “In our opinion, there were no clear winners, just more results that were in line with previous expectations.”

While M&T Bank had a very significant 220 basis point increase in its stress capital buffer, Horowitz said the result will have no impact on repurchases and short- or long-term earnings per share estimates. .

Morgan Stanley’s Graseck said Goldman Sachs generated the biggest positive surprise among money center banks, with a 10 basis point reduction in stress capital bearings, even with a prospect of global growth and more difficult corporate credit.

Graseck said Goldman’s improvement reflects the growth of its consumer banking business and net interest income and an improvement in assets.

It lowered its Bank of America target price to $ 47 per share from $ 49, lowered its Citi target price to $ 57 from $ 60, and lowered JPMorgan Chase’s price target to $ 149 from $ 152.

Outside of Wall Street, stress tests sparked criticism of the Fed from Better Markets, a nonprofit group focused on financial reforms to give all banks a note of approval.

“Despite an increased and almost unprecedented combination of simultaneous shocks and risks to the economy and the financial system, from a pandemic and a war to soaring inflation and speculative financial bubbles, which are reducing the standard of living of most Americans, the Federal Reserve’s stress tests. remain stress-free, “Phillip Basil, director of banking policy at Better Markets, said in a prepared statement. “When all the banks too big to fail pass comfortably year after year, it’s clear that the tests don’t stress or test the banks.”

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