Wednesday, March 14, 2012

Stress tests: Good news for strong banks

Analysts and investors are still digesting the results of the Federal Reserve's latest stress tests, revealed in a surprise announcement Tuesday afternoon. Many agreed JPMorgan Chase & Co. - which released its passing grade ahead of the Fed - was the biggest winner, with Wells Fargo & Co. and other banks performing well, too.

Here are some early reactions:

Keefe, Bruyette & Woods analysts said the results cleared the way for the strongest banks, including San Francisco-based Wells Fargo, which bought Charlotte's Wachovia in 2008, to raise dividends higher than many expected.

Aside from the four banks that failed to meet the Fed's minimum capital requirements by some measures, "other announcements were generally in line with expectations," analysts said.

JPMorgan, which passed Bank of America Corp. as the nation's largest lender by assets "far exceeded" KBW's predictions, with its nickel-per-share quarterly dividend increase and $15 billion stock repurchase plan, above the $10 billion analysts expected. Wells Fargo's dividend increase, to 22 cents per share, was higher than those analysts forecast, they said.

Overall, though, KBW doesn't predict a continued market surge on the Fed results.

Robert W. Baird & Co. analyst David George said the test highlighted the largest banks' strength but wondered, "Now what?"

"Though results were better than expected for some names, we do not expect another fierce rally in these stocks today," he wrote in a research note. Instead, he said, investors' focus will return to banks' core earnings power.

George said Charlotte-based Bank of America performed better than analysts expected, while Wells Fargo and Winston-Salem's BB&T were among those lenders in line with expectations.

Bank of America's "ability to pass the stress tests/market shock scenarios is an incremental positive for shares, given lingering concerns about the company's credit risk, mortgage putback exposure and depressed earnings power," he said. "Greater confidence in the company's capital position should limit downside for shares."

Guggenheim Securities analysts said the Fed results represent a positive for stronger banks, buying them "political credibility and the ability to return more capital to shareholders."

The news is good for the overall U.S. financial system, too, sending a political message that banks are strong and recovered, Guggenheim said. That could lessen pressure from lawmakers on regulators to impose strict capital requirements - but it could also lead the government to demand banks do more to help distressed homeowners and other customers, analysts said.

Meanwhile, the stress tests could change the way bank leaders manage their companies, despite important limits to what the test can actually tell people about a bank's health.

"With stress testing becoming an annual event, the pressure will be on every bank to manage to the test to ensure they pass," the analysts wrote. "This is because anytime anyone from a bank that failed the test testifies, they will have to explain why they are not at risk of imminent collapse. No one will want to fail going forward."


Garth Vader said...

Chris Whalen begs to differ.