Banks Drop After U.S. Regulatory Relief Is Dismissed as `Modest'

(Bloomberg) -- Fresh regulatory moves late Wednesday -- including instructions from the Federal Reserve about its annual stress tests and new Financial Stability Oversight Council proposals -- offered some relief for banks, but probably not enough to boost share prices, analysts said.

Bank shares dropped in early Thursday trading, with the KBW Bank Index down about 1 percent, hurt in part by growth worries. U.S. 10-year Treasury yields fell about 4 basis points to 2.652 percent, the lowest since Feb. 27, tracking steeper declines in euro-zone 10-year yields, which were sparked by the ECB’s growth forecast cut and announcement of monetary stimulus measures. State Street Corp., SVB Financial Group, Citigroup Inc., Comerica Inc. and Bank of America Corp. were among top decliners.

Banks Drop After U.S. Regulatory Relief Is Dismissed as `Modest'

Here’s a sample of what some analysts are saying:

Goldman, Richard Ramsden

The Fed’s instructions offered “a qualitative improvement,” but left open “a quantitative question mark,” bank analyst Ramsden wrote in a note. He noted that the last time the Fed used the qualitative fail on a large-cap U.S. bank was for Citigroup in 2014. All U.S. banks in Goldman’s coverage are now exempt from the test’s qualitative component.

Changes to the qualitative aspect of the tests will help banks cut compliance costs, he said. But, the test’s quantitative portion “does not appear to have changed materially.” He noted the instructions didn’t address potential changes discussed by Fed Official Randal Quarles on Nov. 9, like removing balance sheet inflation over the course of the test.

Goldman is awaiting clarity, with the release of a technical paper on test assumptions, typically released after the instructions. He also warned that the market may have been pricing in a small probability of removing the supplementary leverage ratio (SLR) from the test, which the instructions didn’t discuss, and now probably won’t be included in the technical paper.

Credit Suisse, Susan Roth Katzke

There’s not as much that was new in the instructions as Credit Suisse would have liked, Katzke wrote in a note. “Beyond the elimination of the qualitative objection for all of the participating U.S. large cap banks, the printed instructions pretty much mirror last year’s version, lacking formal incorporation of other proposed changes to the process.”

“Much will be left to the Fed’s models and interpretation of loss content,” she said. Credit Suisse is sticking to its initial view that “if the banks managed through 2018 CCAR, they’ll manage through 2019.” Katzke didn’t change her capital return expectations for about 110 percent gross payout, on average.

Jefferies, Ken Usdin

“While expectations were very low, the hoped-for stress test instruction changes discussed in recent Fed speeches did not appear just yet,” Usdin wrote in a note. Those hopes had included: No implied balance sheet growth; curtailing dividends after the first four quarters of the planning period; suspending buybacks, and the formal removal of the 30 percent dividend payout cap. Even so, Usdin sees an eventual SLR framework formalization which will “address these items one way or the other.”

Getting rid of the qualitative failure test “will be welcomed (except for the 5 non-U.S. banks that are still on the hook),” he said, He added that the “stress test scenarios for 2019 still tough, but perhaps not as bad as 2018.”

Compass Point, Isaac Boltansky

The Fed’s “announcements are clearly positive for banks, but the impact on bank shares should be muted as the changes were modest and expected,” Boltansky said via email.

“The CCAR changes were modest and expected,” he said, while the counter cyclical capital buffer (CCyB )decision was a non-event as it was consistent with expectations.” He added that “the Volcker Rule revision effort is a negative as the timeline will lengthen and the endgame is unclear.”

KBW, Brian Gardner

Wednesday’s regulatory actions should remind investors that “the political environment remains positive for bank stocks,” even with some tough post-midterm elections headlines coming out of Washington, Gardner wrote in a “Washington update” note.

“The Trump administration’s regulatory agenda remains on track,” he said. “While the agenda might not be as aggressively pro-bank as some investors may have anticipated, we continue to believe that banks are operating under the most constructive regulatory environment since the financial crisis,” which is likely to hold “at least through the 2020 presidential election.”

Gardner cited the Fed’s restricting the use of the qualitative objection in the CCAR process, and Bloomberg’s report that regulators are considering re-proposing changes to the Volcker rule. “These developments are probably not market moving but they underscore the relatively positive regulatory environment in which banks operate today,” he said.

Even so, he cautioned negative sentiment still persists for some U.S. banks, particularly Wells Fargo & Co., noting that on March 12 the House Financial Services Committee will hold a hearing on the bank’s “consumer abuses,” which will likely be followed by an April hearing with all of the big U.S. bank CEOs testifying.

Raymond James, Ed Mills

Federal authorities handed large financial firms “regulatory wins” on Wednesday, Mills wrote in a note, by “ending the pass/fail qualitative objection of CCAR,” along with voting against raising big bank capital, and “moving away from designating large financial firms as systemically important.”

Cowen, Jaret Seiberg

The positive news in the Fed’s moves was that “it exempts all domestic banks from the qualitative part of the test and could exempt all foreign banks after the 2020 test,” Seiberg wrote in a note.

“On the disappointing side, the Federal Reserve did not change assumptions on balance sheet growth or distributions. We expect those changes next year as part of the Stress Capital Buffer plan.”

Capital Alpha, Ian Katz

Katz in a note called the spate of deregulatory news -- including CCAR, CCyB, FSOC, Volcker, and M&A news -- “largely positive.” At the same time, he said little if any of the news was surprising. Yet, “by coming at once it’s impactful.”

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