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Stock Analyst Update

Bank Stress Tests Wrap Up

Though a few banks ran into issues, the overall restrictions imposed by the Fed will not be that significant.

Given the tougher tests this year, and our early read on DFAST results, we were not surprised that several banks ran into issues for the 2018 Comprehensive Capital Analysis and Review, or CCAR, stress test. Of the 35 banks undergoing CCAR, 31 firms received outright nonobjections. Goldman Sachs, Morgan Stanley, and State Street received conditional nonobjections, while DB USA Corporation (one of the foreign banks participating for the first time) received an objection on qualitative grounds. We also note that American Express, JPMorgan Chase, KeyCorp, and M&T Bank all submitted adjusted capital plans before the final results were tallied, which allowed them to satisfy all regulatory minimum requirements.

As we predicted, many firms were forced to be more conservative this year than they may have been otherwise, but on the whole, the overall restrictions imposed by the Fed will not be that significant. Morgan Stanley and Goldman Sachs will simply be limited to returning the same amount of total capital as in recent years, and State Street will not be limited in its requested plan, but instead must address certain issues surrounding its exposures to counterparties.

The CCAR test is important, because it reaffirms the resilience of the large U.S. banks to a severe economic downturn and is the constraint on capital returns. Overall, banks have added $800 of common equity capital since 2009 and have brought their aggregate common equity capital ratios from 5.2% to 12.3%, which has significantly strengthened the U.S. banking system. In the future, we project U.S. banks will on average continue to return close to or over 100% of generated capital and begin to shed excess capital. We see the test results as most positive for Wells Fargo and Capital One, as they should be able to repurchase their shares at the largest discounts to our current fair value estimates. We are maintaining our current moat ratings and fair value estimates for the U.S. banks.

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