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Stocks of the biggest U.S. banks gained in Monday premarket trading after the Federal Reserve’s annual bank stress tests results released on Friday stoked optimism that the banks will boost dividends and stock buybacks.
All 22 banks participating in this year’s test weathered a hypothetical severe downturn in this year’s analysis. That will allow them to announce their capital return plans on Tuesday. Citi analyst Keith Horowitz estimates the banks’ stress capital buffers (“SCBs”), reserves the banks are required to set aside to endure downturns, should drop ~70 basis points.
In Monday premarket trading, Goldman Sachs (NYSE:GS) stock jumped 4.1%, Wells Fargo (NYSE:WFC) gained 1.3%, Bank of America (NYSE:BAC) increased 0.9%, Morgan Stanley (NYSE:MS) rose 0.9%, Citigroup (NYSE:C) moved up 0.6%, and JPMorgan Chase (NYSE:JPM) advanced 0.5%.
“In general, the results were positive across the board and supportive of an improving capital return backdrop for all participants,” Jefferies analyst Daniel T. Fannon wrote in a note to clients. “All participants in the test ‘burned’ better Y-Y, led by GS and MTB.”
The banks will be allowed to disclose their dividend and stock buyback plans on Tuesday, Bloomberg News reported, citing a Fed official.
Of the 16 U.S. banks in the test, Jefferies estimates that 11 will get a preliminary SCB of 2.5%, the Fed’s minimum. That compares with six banks with the minimum SCB in 2024. Stress test SCBs won’t be finalized until August.
In Jefferies’ analysis, Wells Fargo (NYSE:WFC) is expected to get a 2.5% SCB, down from 3.8% last year, and JPMorgan’s (NYSE:JPM) SCB is expected to drop to the minimum vs. 3.3% in 2024.
Goldman Sachs (NYSE:GS) emerged from the test as standout. “While we have viewed GS as best positioned to benefit from dereg, the magnitude of the SCB improvement (300bp) was much larger than expected, as it appears GS has been able to effectively argue its business model has a countercyclical component to it,” Citi’s Horowitz said in his note.
Jefferies estimates that Goldman’s (NYSE:GS) SCB dropped to 3.3% from 6.2%. Citi expects GS’s SCB will decline to 3.2%, “driven by an improvement in PPNR (preprovision net revenue), lower trading & counterparty losses, and 50bps improvement on total losses (driven mainly by credit card).”
This year’s stress test’s hypothetical recession was less harsh than 2024’s since the economy was already a little weaker before the test.
Other U.S. banks in this year’s stress test are: BNY (BK), State Street (STT), Northern Trust (NTRS), Truist Financial (TFC), U.S. Bancorp (USB), PNC Financial (PNC), American Express (AXP), Capital One Financial (COF), Charles Schwab (SCHW), and M&T Bank (MTB).
Jefferies’ Fannon notes that M&T Bank’s (MBT) SCB came in better than anticipated at an estimated 2.6%, vs. Jefferies’ expectation in the low 3% range and 120bps below last year’s 3.8%. The company’s stock, though, only edged up 0.1% in Monday premarket.
Non-US-based banks that were required to take part in the test are: Barclays US (BCS), Deutsche Bank’s U.S. subsidiary (DB), RBC US (RY), TD Group US (TD), and UBS Americas (UBS).