Bank Winners and Losers

03/24/2014 11:00 am EST


Jim Jubak

Founder and Editor,

When the Federal Reserve releases Round Two results of its stress test this week, several US banks stand to benefit, while others do not, and MoneyShow's Jim Jubak analyzes which banks may be the victors, and why.

So what US banks will be the winners—and which the losers—when the Federal Reserve releases Round Two of its stress test data on March 26?

Last Thursday’s Round One looked at 30 big US banks to see which met the Fed’s capital targets in the event of a US financial and economic crisis. Only Zions Bancorp (ZION) rallied to meet the Fed’s target. In the event of a crisis, Zion’s capital ratio would fall to 3.5%. That’s below the 5% minimum set by the Fed.

Friday, Wall Street moved on to look at this week’s test. On Wednesday, the US central bank will announce which of the 30 banks on the list have won approval for their capital plans for 2014. Banks winning approval will be able to go ahead with plans for share buybacks and increased dividend payouts. Banks that fail to win approval will have to put buybacks and dividend payouts (or, at least, increases in dividend payouts) on hold while they resubmit plans for raising capital and for distributing it to shareholders.

Zions Bancorp isn’t the only bank in danger of getting a “No” from the Fed this week. Bank of America (BAC), Morgan Stanley (MS), Goldman Sachs (GS), and JP Morgan Chase (JPM) all came in with capital ratios below 7% in the Fed’s test. That puts them relatively close to the 5% limit and might lead the Fed to veto their plans for buybacks and dividend increases. Last year, the Fed gave an initial “No” to both Bank of America and Citigroup (C). (Citigroup is a member of my Jubak’s Picks portfolio.)

The capital ratio under the Fed’s stress test isn’t a straightforward indicator of how the Fed will rule. The central bank will also consider the capital distribution plans submitted by individual banks and how much capital buffer any plan would leave. For example, the consensus among Wall Street analysts is that the Fed will approve the plan from JPMorgan Chase, because it projects distributing only about $10 billion from the bank’s $17 billion capital buffer above the Fed’s stress test minimum.

The consensus also points to Bank of America as the closest to a potential veto. The Fed’s stress test showed the bank generating a loss of $49.1 billion in that scenario. That’s the biggest stress test scenario loss among the 30 banks.

The Fed will also take into account its judgment of the accuracy of a bank’s own capital planning. Here a bank that has produced results from its own models, that are more positive than those of the Fed, may actually wind up at a disadvantage.

So, for example, one reason to think the Fed will approve JPMorgan Chase’s capital distribution plan is that the bank’s own projections for its capital ratio under the Fed’s stress test scenario were almost identical with those produced by the Fed. The difference was scant 0.2 percentage point. Morgan Stanley’s in-house projections were, on the other hand, 2 percentage points more optimistic than the Fed’s numbers. Bank of America came in 2.6 percentage points above the Fed’s scenario.

With analysts estimating that the Bank of America capital plan looks at returning $6 billion to $7 billion to shareholders and with the Fed estimating that the bank has only $6.5 billion in excess capital under its stress scenario, you can see why the bank tops the list of potential Fed capital plan vetoes in this week’s Round Two.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio here.

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