Analysts see lowest ratings for Bank of America and JPMorgan in Fed stress test

Bank of America Corp. and JPMorgan Chase & Co. had the lowest marks among banks’ overall passing grade in the Fed’s annual stress test, analysts at Jefferies and Citigroup said Friday.

Also weighing in on the stress test, Morgan Stanley analyst Betsy Graseck cut her price targets for Bank of America Corp. BAC,
Citigroup Inc. C,
and JPMorgan Chase JPM,
saying the results suggest the three banks will need to keep dividends flat, as well as eliminate redemptions and reduce their risk-weighted assets to generate a Tier 1 Tier 1 capital ratio above their new required minimums.

These banks and others will be allowed to begin sharing their capital return plans with shareholders on Monday after the close of trading.

Breaking down the US Federal Reserve’s annual stress test released Thursday, Jefferies analyst Ken Usdin said the results “were challenging” for Bank of America, Citigroup and JPMorgan Chase and four regional banks: Capital One Financial Corp. . COF,
Huntington Bancshares Inc. HBAN,
PNC Financial Services Group Inc. PNC,
and “especially” M&T Bank Corp. MTB,

“Excess capital is scarcer, with an increase in unrealized losses and growth in risk-weighted assets that are able to keep capital return programs in check compared to previous years, particularly for banks. systemically important global markets,” Usdin said. “All things considered, we expect banks to continue to lower their expectations for return on capital – many have already done so.”

Stress test “relative winners” include Goldman Sachs Group Inc. GS,
Morgan Stanley MS,
and Wells Fargo & Co. WFC,
with respect to their stress capital buffer results. Among the regional banks, Ally Financial Inc. ALLY,
and Discover Financial Services DFS,
more successful than others, he says.

After falling mostly in previous sessions, bank stocks rose along with the broader market on Friday, with the Financial Select SPDR ETF XLF,
up 1.5% in Friday morning trade, the KBW Bank Index BKX,
gained 3.1% and the S&P 500 SPX index,
up 2.3%.

Bank of America rose 0.8%, while JPMorgan Chase rose 2.5% and Citigroup climbed 3.2%. Goldman Sachs shares rebounded 4.9%, Wells Fargo rose 7.3% and Morgan Stanley 5.6%.

Coming to some of the same conclusions as Usdin, Citigroup analyst Keith Horowitz said Bank of America scored the “most disappointing” results of the stress test, with an estimated increase of 90 basis points (0.9 percentage point) of its capital buffer, after by JPMorgan Chase with an 80 base increase in its stress capital buffer.

“Buybacks are likely suspended for BAC and JPM until 1Q23,” Horowitz said. “There were no clear winners, in our opinion, just more results in line with previous expectations.”

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

Morgan Stanley’s Graseck said Goldman Sachs generated the biggest positive surprise among money center banks, with stress capital cushions down 10 basis points, even with the outlook for global growth and corporate credit. more difficult.

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

She cut her price target for Bank of America to $47 a share from $49, lowered her price target for Citi to $57 from $60, and cut JPMorgan Chase’s price target to $149 instead of $152.

Outside of Wall Street, the stress tests have drawn criticism of the Fed from Better Markets, a nonprofit group focused on financial reform, for giving all banks a passing grade. .

“Despite an increased and almost unprecedented combination of simultaneous shocks and risks to the economy and the financial system – from a pandemic and war to soaring inflation and speculative financial bubbles – which are driving down the level lives of most Americans, the Federal Reserve’s stress tests continue to be too stress-free,” Phillip Basil, director of banking policy for Better Markets, said in a prepared statement. “When all banks too large to fail comfortably pass year after year, the tests clearly don’t stress or test the banks.”