Bank of America, Citigroup and JPMorgan rated poorly in 2022 Fed stress test (NYSE:JPM)

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Following this year’s Dodd-Frank Act Stress Test (DFAST), Bank of America (NYSE: BAC), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM) may have to raise their internal target ratios and delay share buybacks to boost their Common Equity Tier 1 ratios, analysts said.

While some banks fared better than others, all 34 banks subjected to the stress tests passed, the Federal Reserve said after Thursday’s close. After Monday’s market close, the banks will announce their dividend and share buyback plans for the third quarter of 2022 through the second quarter of 2023.

“Overall, while most regional banks, trust banks, and even brokers were doing quite well, 2022 results were a bit tougher for universal banks and card companies than we expect. planned,” Evercore ISI analyst Glenn Schorr wrote in a note to clients.

Jefferies analyst Ken Usdin summed up the DFAST results: “Excess capital is scarcer, with rising unrealized losses and growth in RWAs (risk-weighted assets) that are poised to sustain investment programs under control compared to previous years, in particular for G-SIBs (global systemically important banks).”

Citi (C) appeared “to be the tightest capital position and should reduce redemption expectations and build capital,” Evercore’s Schorr said. “All other banks appear to be able to deliver the expected capital installments from the street, although we believe several will slow their takeovers given the impending economic backdrop.”

It puts JPMorgan Chase (JPM) on that list and possibly Bank of America (BAC). State Street (STT) performed 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 banks’ new stressed capital buffer suggests BofA (BAC), Citi (C) and JPMorgan (JPM) will have to keep dividends unchanged, eliminate redemptions and reduce risk-weighted assets to generate a CET1 ratio above their new required minimums.

The largest increase in the estimated SCB was at M&T Bank (MTB) – at 5.0% versus 2.5%, Morgan Stanley’s Graseck said. Yet she keeps capital return assumptions unchanged for the bank, “Our CET1 estimates for MTB remain comfortably above their new implied minimum requirement for the coming quarters,” she wrote in a note to clients. .

Usdin of Jefferies also noted that M&T Bank (MTB) was poorly screened 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) received “modestly worse” review.

Meanwhile, Goldman Sachs (GS), Morgan Stanley (MS) and Wells Fargo (WFC) were “relative winners in the SCB results,” he said.

For positive surprises, Graseck highlighted Goldman Sachs (GS), Ally Financial (ALLY) and Discover Financial (DFS). For Goldman, its estimated SCB fell 10 basis points, likely helped by growth in its consumer business. She estimated that the estimated SCBs of ALLY and DFS would have to fall by 100 basis points each to the floor of 2.5% in the event of an improvement in provisions/assets.

Wolfe Research expects Street estimates for share buybacks to be too high in most G-SIBs, with larger capital shortfalls at Citi (C), Bank of America (BAC) and JPMorgan (JPM), and much smaller deficits at Morgan Stanley (MS) and Goldman Sachs (GS), wrote Steven Chubak in a note.

Oppenheimer analyst Chris Kotowski, however, doubts the DFAST results will have a big impact on banks’ capital return plans. Rather, he points to other cross-currents, including skyrocketing loan growth, AOCI (Other Accumulated Comprehensive Income) weighing on capital ratios and the prospect of a recession.

This year’s stress tests have resulted in a bigger economic decline than in 2021, with unemployment peaking at 10%, stock prices falling 55% and commercial real estate falling 40%.

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