Analysts praise banks and puzzle over Fed after stress tests

By Steve Gelsi

Oppenheimer warns investors to 'try not to burn too many brain cells on deciphering the Fed's logic'

Oppenheimer analysts cautioned investors not to "burn too many brain cells on deciphering the Fed's logic" as analysts gave the annual exercise mixed reviews on Thursday.

The Fed has now wrapped up its Comprehensive Capital Analysis and Review (CCAR), which is the annual stress test that results in adjustments to stress capital buffers on bank balance sheets.

Given most of the same economic scenarios in last year's test, this year the banks saw a greater impact on their balance sheets due to a number of industry headwinds, including higher credit-card losses and tougher corporate credit conditions.

All told, the 2024 test measured an average loss of 2.8% of common equity tier-one capital, which is worse than the 2.5% impact in 2023's CCAR. Common equity tier-one capital is the money banks are supposed to set aside to cover potential losses in their risk-weighted assets.

"One adverse aspect of being a bank analyst these days is that you are expected to sacrifice one otherwise lovely summer evening to trying to decipher the Fed's logic in its stress test and then explain it to investors," Oppenheimer analyst Chris Kotowski said. "Our advice is just to take the results as given."

Analysts pointed out that other regulatory uncertainties - namely the so-called Basel III endgame proposal - will weigh on any plans by banks to buy back stock or pay dividends.

"The main event for capital returns will be the final outcome Basel 3 endgame," Kotowski said.

Among the largest banks in the United States, Citigroup Inc. (C) is expected to benefit from a 0.2% cut in its stress capital buffers. Goldman Sachs Group Inc. (GS) is seen as having an increase of nearly 1%.

Analysts praised how the balance sheets of all 31 banks in this year's stress test withstood the worst economic scenarios by the Fed.

"The outcomes of this year's stress test demonstrates that banks' resilience remains robust, with a few exceptions," said Moody's analyst Laurent Birade.

Janney analyst Christopher Marinac said the stress test results "confirm that banks can weather a very nasty storm where real-estate prices and stock prices plummet and interest rates suddenly shift."

Overall, the banks' balance sheets are "very stable and resilient," he said.

Wedbush analyst David Chiaverini said the stress tests were "incrementally positive" for Huntington Bancshares Inc. (HBAN) and M&T Bank Corp. (MTB) and slightly negative for Fifth Third Bancorp (FITB), Citizens Financial Group Inc. (CFG) and KeyCorp (KEY).

Analysts also crunched out estimates on the impact on their stress capital buffers after the CCAR.

Jefferies analyst Ken Usdin said on average, the banks in his coverage will be required to boost their stress capital buffers by 0.3%.

Meanwhile, banks are under a request by the Fed to wait until at least the close of trading on Friday before announcing any dividend or stock-buyback plans. Some banks may wait until their second-quarter financial results in July.

Philip Van Doorn contributed.

-Steve Gelsi

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06-27-24 1044ET

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