Bank Shares Pop After Fed Stress Test Results
(Bloomberg) -- U.S. bank stocks may be set to put a record losing streak firmly behind them as results from a second round of Federal Reserve stress test signal it’s time to buy. Analysts at Goldman Sachs and Bank of America say there may now be a catalyst for a relief rally as the results may "ignite a new bid in banks."
Clear winners include Wells Fargo, which was formerly in the Fed’s penalty box, and which now plans to buy back up to $24.5 billion in shares and to increase its dividend. Wells Fargo shares are rising 6 percent in early trading, the most since November 2016. Ally Financial and Santander Consumer USA received an analyst upgrade after the results; Ally is up as much as 4.9 percent and Santander Consumer USA is rising 3.7 percent. The KBW bank index is rallying 1.8 percent, led by Wells Fargo.
Here’s a sample of analyst commentary:
Bank of America, Erika Najarian
"CCAR results could ignite a new bid in banks," as covered banks may grow dividends by 34 percent and buy back $80.3 billion of stock, versus $60.5 billion last year.
Najarian sees big and regional banks outperforming amid expectations banks will return 114 percent of earnings and 10 percent of market cap, and after tougher-than-market-expected results from a first round of stress tests, and a risk-off backdrop, meant "bank stocks have been sloppy over the past week." She doesn’t believe the banks that used the "mulligan" – JPMorgan, KeyCorp, M&T Bank, which had to resubmit original capital asks due to DFAST results – will be penalized. She flags Wells Fargo, JPMorgan and Huntington as "the most notable positive surprises."
Goldman, Richard Ramsden
Banks may find a catalyst for a "relief rally" as a second round of Federal Reserve stress test results were better-than-expected and dividends are set to grow. Goldman sees the biggest relative winners as Wells Fargo, Huntington, Regions, SunTrust, and Fifth Third, and notes Wells Fargo’s buyback of $24.5 billion should reduce effective share count by 9 percent.
Morgan Stanley, Betsy Graseck
"A tougher CCAR ... but a flexible and pragmatic Fed means you shouldn’t be surprised to see banks resubmit for additional capital return. While this year’s CCAR exam was tougher for banks, it also showcased a Fed that appears to have a more practical, pragmatic approach in regulating the banks."
Graseck notes the Fed allowed three banks to proceed with their capital plans via conditional nonobjections, despite stressed capital ratios that fell below the minimum required level due to either one-time adjustments from tax overhaul or multiple standard deviation moves in the global market shock. Sees Wells Fargo, BofA, and Citigroup as having the most potential to resubmit plans later this year, while Northern Trust, Wells Fargo and BB&T may see the most EPS upside from returning excess capital.
RBC, Gerard Cassidy
"The money centers, Citigroup, JPMorgan, and Wells Fargo were winners, led by Wells Fargo." Cassidy also flags Bank of America as among winners. "Morgan Stanley and Goldman results were less fulfilling but could have been worse."
KBW, Brian Kleinhanzl
"Gross capital payout ratios were below our expectations; still, payouts increased by seven percentage points year over year for the median bank. Ultimately, the Fed applied more stress than we expected going into DFAST, and that was reflected in the final capital plans that banks submitted."
Janney, John Rowan
Rowan upgrades Ally and Santander Consumer USA to buy from neutral after the Fed didn’t object to their capital plans, both of which included a material increase in capital distributions in the form of repurchases and dividends. "Notably, Ally’s share repurchase plan is 32% higher than last year and Santander Consumer now has a repurchase plan in place."
Evercore ISI, Glenn Schorr
"We’d call this a successful enough CCAR season in aggregate (and better than what DFAST results implied) as the total payout dollars approved by the Fed rose handily y/y, though the payout ratio slightly declined due to a combination of higher earnings (tax reform), a harder test and a handful of companies that had some issues."
"Regionals were really good (especially Wells Fargo) while cards were down with low expectations." Brokers Goldman and Morgan Stanley "were a little low (but got a hall pass)."
Credit Suisse, Susan Roth Katzke
Some large cap banks fared "better, some worse, some in line," with covered banks approved for what translates to 94% gross and 89% net payouts (versus an estimate of 102% gross and 92% net). "On a dollar amount basis, the aggregate of approved capital returns was just 1% below forecast."
Bernstein, John McDonald
"2018 CCAR results were solid overall, as the group saw a healthy step-up in both share repurchases and dividends, and total gross payouts came roughly in-line with consensus estimates. That said, performance did vary from bank to bank, with some big increases and beats (Wells Fargo, SunTrust, Regions) and some falling short of expectations and/or returning less to shareholders than last year (PNC, BB&T, Morgan Stanley)."
Portales, Charles Peabody
"It’s worth noting that, when JPMorgan resubmitted its new request, it most likely chose to maintain its dividend request, while reducing its share buyback request. This suggests that Jamie Dimon is beginning to see less value in share buybacks at current high price-to-book levels."
"The emphasis on dividends may indicate a maturing growth cycle for this industry."
"Wells Fargo, Huntington Bancshares, and Ally Financial generated the biggest upside surprises, while Morgan Stanley, PNC and State Street were the biggest disappointments."
Height Capital Markets, Ed Groshans
CCAR results "were very strong, in our view, with a few notable exceptions." JPMorgan Chase, American Express, Keycorp, and M&T Bank "appear to have submitted aggressive capital return plans that needed to be adjusted downward based on the Federal Reserve’s model. As expected, the Fed challenged Goldman Sachs’, Morgan Stanley’s, and State Street Corporation’s results."
Compass Point, Isaac Boltansky
"We were left with three policy-related takeaways from the release: (1) this test shows the value of the mulligan, with more successful mulligans than ever during this cycle; (2) this Federal Reserve showed leniency with one-time tax issues (Goldman, Morgan Stanley) and a counter-party concern (State Street), which we view as a more generous paradigm than could have been expected under previous Federal Reserve leadership; and (3) the banking system remains incredibly well capitalized, which will bolster calls for additional narrow tweaks to the stress testing regime."
Cowen, Jaret Seiberg
"CCAR was tough and the banks had more trouble with it than in recent years. Yet the Federal Reserve was not so rigid as to punish banks for circumstances beyond their control such as the timing of when Congress enacted tax reform."
"This reinforces our broader view that the new team at the Federal Reserve will look for ways to reduce the burden on the banks, but they generally support the post-crisis regulatory regime and are more interested in common sense tweaks than wholesale repeal."
Susquehanna, Jack Micenko
"Despite the increases in payouts, we remain cautiously optimistic as the current valuation is fair and not attractive enough," Micenko said, commenting on regional banks.
Guggenheim, Jeff Cantwell
American Express "appears to have been as aggressive as possible with this year’s buyback request." Raises price target to $106 from $104, reiterates neutral rating.
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