The Zhitong Finance App learned that in the Fed's annual stress test on the US banking industry, some of the larger commercial banks: Capital One Financial (COF.US), CFG.US (CFG.US), and Truist Financial (TFC.US), are likely to be the most negatively affected because they will be required to hold more amounts of capital to prevent a potential economic downturn. Generally speaking, the level of pressure capital buffer (SCB) is important to investors because the more money banks set aside to deal with any potential economic shocks, the less money banks return to shareholders in the form of dividends or stock buybacks.

According to information, on Wednesday local time, all 23 major US banks passed the Federal Reserve's annual stress test, clearing the first hurdle to spending. Stress tests include hypothetical scenarios such as severe economic downturns, high levels of unemployment, and the collapse of real estate. Banks will be able to continue providing loan funds to consumers and businesses on Friday (6/30).

According to information, this annual test has received close attention from the financial industry because banking giants that have passed the test can return billions of dollars to investors. But this year's results may not bring news of dividends and buybacks soon, as many banks have warned that they will delay these measures until the new capital requirements they have been setting for years are clarified. The Federal Reserve said that banks can begin announcing their spending plans on Friday while also considering comprehensive reforms to their regulatory work.

Financial institutions such as Capital One did not perform well in the 2023 Fed stress test

After the test results were announced, J.P. Morgan analyst Vivek Juneja downgraded the rating of Investors Financial Group from “increased holdings” to “neutral.”The analyst said its capital requirements will increase to the estimated 8.6% CET1 ratio, putting further pressure on the financial institution's profitability.

According to information, Capital One Financial (COF.US), Investors Financial Group, and Truist Financial (TFC.US) have been the most negatively affected because they will be required to hold more amounts of capital to prevent a potential economic downturn.

Evercore ISI analyst Glenn Schorr pointed out in a report to clients that in comparison, JPMorgan Chase (JPM.US), Bank of America (BAC.US), and Goldman Sachs (GS.US) have improved the most. J.P. Morgan's pressure capital buffer fell 119 basis points, Bank of America fell 90 basis points, and Goldman Sachs fell 88 basis points.

Schorr said that although the environment caused by the recession hypothesized in this year's stress tests is more severe than 2022, the bank's SCB average has increased by 14 basis points.

He said that Bank of America (BAC) performed the best in DFAST (Dodd-Frank Act Stress Test) because its net revenue increased the most before pressure provision. It had the second lowest loan loss rate among the top five banks (Citibank, J.P. Morgan Chase, Bank of America, Goldman Sachs, and Morgan Stanley), and ranked third in AOCI (Accumulated Other Comprehensive Income) earnings.

Schorr pointed out that Citigroup (C.US) is the only globally systemically important bank (G-SIB) with an SCB increase of 25 basis points, mainly due to lower PPNR pressure and increased credit card loss limits.

Jefferies analyst Ken Usdin emphasized that CET1 capital ratio requirements for Wells Fargo Bank (WFC.US), Morgan Stanley (MS.US), M&T Bank (MTB.US), and PNC Finance (PNC.US) will decline.

Some analysts are skeptical about the test results

However, investors can't explain too much about how much return banks can give to shareholders, even if they performed relatively well in the Fed's stress test this year. Usdin believes that capital return activity is limited in the short term, as banks await a clear statement from regulators on the “final phase” of the “Basel III Agreement” and the Federal Reserve's overall capital assessment.

“These upcoming rules could lead to higher capital requirements for all banks with assets over $100 billion. Many banks have withdrawn part of their capital returns to prepare for potential increases in capital requirements.”Usdin said in a report.

Schorr said the final phase of Basel III is expected to begin around July 18. These standards are set by the Basel Committee on Banking Supervisory Committee (Basel Committee on Banking Supervisory Committee) under the Bank for International Settlements (BIS).

However, there are also analysts who don't pay much attention to the Fed's stress test results. Dick Bove, an analyst at Odeon Capital, wrote: “Although it is important to know that these banks maintain healthy capital ratios, this test has no definitive relationship with the reasons why the three major banks (Silicon Valley Bank, Signature Bank, and First Republic Bank) went bankrupt this year.” It is important to note that the Federal Reserve checked bank balance sheets at the end of 2022, which means that the test results on Wednesday local time did not fully reflect the consequences of the banking crisis during the year.

The Federal Reserve's stress test uses a hypothetical recession to assess the health of banks, where interest rates often fall and the value of securities and loans rises. But recent bank failures have been triggered by rising interest rates, falling asset values, and crowding.“A further rapid rise in interest rates could easily cause more banks to go out of business in the short term.” Bove emphasized. “The stress tests completely ignored that possibility.” He stressed that it is very important for investors to evaluate each bank's balance sheet one by one before investing in any bank's shares.

Dennis Kelleher, head of Washington-based Better Markets, said there is an urgent need to reform testing. The agency advocates stricter financial rules. In a statement, he said that this was dangerous, misleading, incomplete, and would bring false comfort, adding that the 2023 test results did not fully reflect the scope of risks in the banking system.

Chris Kotowski, an analyst at Oppenheimer, a well-known Wall Street investment agency, is also skeptical about the results. He thought the “exploratory market shock” (exploratory market shock) part of the stress testing session was very strange. “Will Wells Fargo, which has a relatively small trading business, lose 37% more on transactions than Bank of America, which owns Merrill Lynch? Is this really going to be the case?” he said. “Regardless, we don't think stress testing is an event factor for the stock market in 2023, and continue to recommend Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, and UBS.”

From a broader perspective, Seeking Alpha analyst Christopher Robb believes that the stress test results and related remarks made by the Federal Reserve support bullish sentiment on US stocks.