Several Undervalued Banks Stand to Benefit From Fed's Review
We see the CCAR results as most positive for Wells Fargo, Capital One, and Citi.
All 34 banks undergoing the 2017 Comprehensive Capital Analysis and Review by the Federal Reserve Board received a non-objection to their capital plans. The CCAR is important, because it reaffirms the resilience of the large U.S. banks in a severe economic downturn and is the constraint on capital returns. At the aggregate level, banks were approved to roughly return as much capital as they were projected to generate between the third quarter of 2017 and second quarter of 2018. We see the results as most positive for Wells Fargo (WFC), Capital One Financial (COF), and Citigroup (C), which should be able to repurchase their shares at a discount to our fair value estimates. We are maintaining our economic moat ratings and fair value estimates for the U.S. banks.
While the board gave a non-objection to Capital One’s proposed plan, it’s on the condition that the company will resubmit its capital plan by Dec. 28. The Fed release stated, “Notable weaknesses were identified in the oversight and execution of the firm’s capital planning practices, which undermined the reliability of the firm’s forward-looking assessment of its capital adequacy under stress. Specifically, the firm’s capital plan did not appropriately take into account the potential impact of the risk in one of its most material businesses.” Neither the Fed nor Capital One provided any additional color on what material weaknesses the company must address. However, we don’t believe this represents a substantial risk to the company’s business or our fair value estimate of $102 per share. Despite the conditional approval, Capital One can still repurchase as much as $1.85 billion in shares by the end of June 2018 and is expected to pay a $0.40 dividend in August. For perspective, last year Morgan Stanley (MS) received a conditional non-objection that it successfully addressed by year-end, and it has been able to carry out its capital plan.
Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.