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What the Stress Test Results Mean for Banks

Capital returns are coming back, but don't forget about valuations.

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The Federal Reserve Board recently released the results of its 2021 stress tests of 23 large U.S. banks. The tests showed the banks easily maintaining adequate capital ratios in a severe economic downturn, and the Fed lifted its capital return restrictions as of June 30. Repurchases and dividend growth are coming back for the banking sector, but we advise investors to think beyond a simple capital return thesis. Valuations matter, no matter how much excess capital any bank has. We see several banks with outsize opportunity for share repurchases but few bargains from a valuation perspective. We think it pays to be selective in the current environment.

Overall, Banks Passed Easily

Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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