US bank stocks rise as lenders sail through Fed's stress test

WASHINGTON: U.S. bank stocks rose in early trading on Thursday after the Federal Reserve's stress test showed the lenders have adequate capital to survive an economic slump even though analysts doubted if that would lead to higher returns for shareholders.

The test showed the average capital ratio for the 23 banks, with assets of more than $100 billion each, was higher than last year when the central bank had reviewed 34 lenders against a slightly easier scenario.

This year's test, which was devised before the latest banking crisis, checked if banks would stay above the minimum 4.5% capital ratio during economic stress and macroeconomic instability.

Shares of the top performer in the test, Charles Schwab (SCHW.N), rose 2.1%.

Big banks JPMorgan Chase (JPM.N), Wells Fargo (WFC.N), Morgan Stanley (MS.N), Goldman Sachs (GS.N) and Bank of America (BAC.N) gained between 1.4% and 3.2%.

Banks will disclose their new stress capital buffer in the coming days and Well Fargo expects a reduction in the capital requirements for JP Morgan, BofA and Goldman.

"By bank, "Golaith is Winning", mostly," Wells Fargo analysts said.

While the test results paved the way for more dividends and buybacks, Wall Street analysts warned an uncertain economy and banks awaiting regulatory clarity will lead to limited shareholder returns in the near-term.

"Upcoming regulations will likely lead to higher capital requirements for all banks above $100 billion of assets," said analysts at Jefferies, adding that many banks have already pulled back on capital return.

Goldman Sachs analysts said market focus will likely return quickly to potential increases to stress capital buffer and tougher regulations against the backdrop of Basel III revision.

Citizens Financial (CFG.N) reversed premarket losses to trade 1% higher even though J.P. Morgan downgraded the stock to 'neutral', saying an increase in capital requirements could hurt profitability.

Citigroup (C.N) rose 0.7%, but trailed its peers as analysts said higher stress capital buffer would hamper its efforts to boost profitability.

"Citi will now have the highest CET1 requirement among our banks at 12.3%," J.P. Morgan analysts wrote in a client note.

Bank of New York Mellon (BK.N), State Street (STT.N), and US Bancorp (USB.N) rose between 0.7% and 1.5%.

RBC Capital Markets analysts said though the largest U.S. banks remain strong, management teams will likely be prudent on capital.

"With the recent banking crisis driving banks to be more conservative..., we see share buyback activity as being limited for the remainder of 2023," the brokerage said.

U.S. banks have regained some ground after a troubled start to the year that was marked by the collapse of three mid-sized banks.

CRITICS WORRIED ABOUT SMALLER BANKS

Critics, however, said the test results excluded mid-sized lenders and did not reflect the fallout from the latest banking crisis that had forced the government to step in and protect depositors.

"Everyone knew the banks would pass. It's not the 23 largest banks that were tested that people are worried about. It's the more than 4,000 smaller banks that people are curious about," said Brian Jacobsen, Chief Economist, Annex Wealth Management, Menomonee Falls, Wisconsin.

The KBW Regional Banking Index (.KRX) has recovered 6.04% this month, but still remains down 24.5% for the year. The S&P 500 Banks Index (.SPXBK) is up 0.9% quarter-to-date, but has fallen 12.2% so far this year.