Big Banks Clear Dodd-Frank Stress Test: 5 Top Winners
Zacks Investment Research | Jun 21, 2018 09:31PM ET
The Federal Reserve released the first round of its annual stress test results, mandated by the Dodd-Frank regulation. The findings showed that the 35 largest U.S. banks are well positioned to put more money in dividends, share buybacks and business investments. The banks have sufficient capital balance to withstand severe recession.
The results have been announced at a time when the Fed is forging ahead with rate hikes, reflecting an economy that is improving by the day. Banking on such positive developments, investing in sound bank stocks that have passed the litmus test will be judicious.
What Are the Dodd-Frank Act Stress Tests?
The Fed started testing banks in 2009, two years after the beginning of the financial crisis that resulted in a recession. The Fed had to test all U.S. bank holding companies with more than $50 billion in assets, per the Dodd-Frank law enacted by former president Obama in 2010.
But the threshold was raised to $100 billion last month by President Trump. These banks are subject to the Comprehensive Capital Analysis and Review (CCAR) that determines whether they can fund dividend payments and share buybacks amid economic turmoil.
Banks Clear First Round of Fed’s Toughest Annual Stress Tests
All 35 banks that underwent the annual Dodd-Frank Act Stress Tests showed that they have enough capital buffers to weather an economic meltdown and recessions modelled by the Fed. These banks can withstand a situation where unemployment rate rises to 10%, an almost 6% increase from the current level; the stock market tanks by two-thirds and home prices plunge by 30%.
Banks’ capital scores remained comfortably above regulatory requirements in the first round of the stress tests, even though they had to bear losses due to higher credit card balances and one-time accounting challenges enacted by the recent congressional overhaul.
Fed Vice Chairman of Supervision Randal Quarles added that “despite a tough scenario and other factors that affected this year’s test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession”.
Banks Are Well Poised to Meet Financial Obligations
All 35 banks stayed above the 4.5% minimum capital ratio in a severely stressed situation. When it comes to assessing the ability of a bank to meets its financial obligations, State Street Corporation’s (NYSE:STT) 5.3% capital ratio turned out to be the lowest, per Fed. Credit Suisse (SIX:CSGN) Group AG (NYSE:CS) topped the list with 17.6%, followed by UBS Group AG (NYSE:UBS) and Banco Santander (MC:SAN), S.A. (NYSE:SAN) at 16.4% and 15.2%, respectively.
The diagram shows all the 35 banks that have cleared the minimum capital ratio to satisfy the Fed’s concern.
Fed Rate Hikes Bode Well for Banks
While the stress test showed that the banks could withstand a downturn, it came at a time when the Fed lifted a key U.S. interest rate for the second time this year and signaled a slightly more aggressive plan to tighten monetary policy in the near term. Interest rates rose again as the U.S. economy gained strength and inflation crawled higher.
The Fed, as widely expected, raised its benchmark federal funds rate by a quarter percentage points to a range of 1.75% to 2% this month and predicted two additional rate hikes this year. This will take the count to four increases instead of three as planned earlier.
Needless to say, higher interest rates boost bank profits by increasing the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
5 Biggest Gainers
Given the positive trends, we have selected five solid banks that have passed the first round of the stress test. These selected banks carry a Zacks Rank #1 (Strong Buy) and 2 (Buy). You can see Zacks Investment Research
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.