US:15 of 19 Big Banks Pass Fed’s Latest Stress Tes
On Tuesday, the central bank said that 15 of the 19 largest financial firms had enough capital to withstand a severe recession. The results, announced two days ahead of schedule, paved the way for JPMorgan Chase and other banks to bolster dividends and buy back shares.
“When you put banks under the kind of dramatic scenarios that the Fed did — and they are still doing well — it tells you how well capitalized the majority of the banks are coming out of this downturn,” said Michael Scanlon, a senior equity analyst with Manulife Asset Management in Boston.
But the stress tests also underscored the uneven nature of the industry’s recovery. Firms like JPMorgan and Wells Fargo are proving resilient, as they clean up their books and the economy improves. Still others, including Citigroup and Ally Financial, remain on shaky ground, grappling with soured mortgages and other troubled businesses.
Banks are completing their third round of stress tests. Developed in the wake of the financial crisis, the examination is intended to assess how banks will fare under weak economic conditions. The Fed looked at whether banks would have enough capital to weather a peak unemployment rate of 13 percent, a 21 percent drop in housing prices and severe market shocks, as well as economic slowdowns in Europe and Asia.
The Fed’s stress tests assumed that the 19 banks would be slammed with $534 billion of losses in just over two years. Even after such hits, most banks would emerge with adequate capital, the central bank said Tuesday. One measure of capital for the banks, which currently stands at 10.1 percent of assets, would fall to 6.3 percent in the Fed’s ugly projection.
As fragmentary results of the tests circulated before the end of trading, the news buoyed shares of some banks.
JPMorgan shares were up 7 percent. Stock in both Bank of America and Goldman Sachs jumped by 6 percent.
The individual results are likely to intensify questions about a bank’s health. In the stress tests, the Fed projected that a crucial measure of Citigroup’s capital cushion would drop to a low of 4.9 percent of its assets.
Only Ally Financial and SunTrust Banks fared worse. A spokeswoman for Ally Financial said that the Fed’s stress test “dramatically overstates potential contingent mortgage risk.” SunTrust did not return calls for comment.
When banks don’t pass muster, the central bank can force them to raise more capital or postpone their dividend plans. On Tuesday, Citigroup said the Fed had rejected its proposal to return capital to shareholders. The firm intends to submit a revised plan to the central bank this year and “to engage further with the Federal Reserve to understand their new stress loss models,” it said in a statement.
Banks with a clean bill of health can get the green light to increase dividend payments. Such moves could help appease shareholders whose bank stocks have been battered since the financial crisis.
With strong results in hand, JPMorgan Chase announced that it would raise its quarterly dividend by 5 cents, to 30 cents, and buy back at least $15 billion of its stock through 2013.
The bank disclosed its dividend plans two days earlier than when the Fed was scheduled to announce the stress tests. In a conference call, a senior Fed official said JPMorgan’s early move was the result of miscommunication. JPMorgan’s chief executive, Jamie Dimon, has frequently criticized certain measures aimed at increasing capital since the financial crisis.
JPMorgan’s move was a bold show of optimism. The share repurchases alone — roughly $12 billion this year — would amount to roughly two-thirds of analysts’ expected earnings for the bank for the year.
Despite the apparent severity of the tests, some analysts say they think it is too early for the Fed to allow large banks to take actions that could reduce capital. “It’s irresponsible,” said Anat Admati, a professor of finance and economics at Stanford University. Professor Admati says that depleting capital can expose the wider economy to risks because it leaves banks more exposed to shocks.
Another potential shortcoming in the tests is that they don’t focus on one of the main problems the industry faced during the financial crisis, the difficulties banks had borrowing money in the markets.
The big question now is whether the latest stress tests will improve confidence in the banking system. Shares in banks languished after the last stress tests, indicating that investors still had big doubts about banks’ balance sheets.
The strength of banks’ loan books varied greatly. Under extreme stress, the Fed said, Citigroup would lose 9.7 percent of its first mortgage loans, more than any other bank. Both Wells Fargo and PNC would suffer losses of at least 9 percent.
In business loans — called commercial and industrial loans by bankers — Citi and U.S. Bancorp had the worst portfolios, while Wells Fargo and Fifth Third had the shakiest credit card portfolios. In commercial real estate, regional banks appear to be the most vulnerable. Under the Fed’s test, Fifth Third would suffer losses of 11.3 percent of its loans, with Regions Financial the only other bank expected to lose at least 7 percent of its loans.
Bank of America could serve as an important litmus test for whether the market has confidence in these results. In most troubled outlooks, the firm’s capital levels remained above the Fed benchmarks. But the bank has large holdings of home loans, which could still expose it to further losses.
“The tests showed that those who didn’t fare as well have a lot of vulnerability to the residential mortgage market,” said Mr. Scanlon of Manulife.
Floyd Norris contributed reporting.