Stress Test Confirms Our Overall Banking Sector Thesis
Our key takeaway from the annual Federal Reserve test is that the banking system appears to be well-capitalized.
The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system appears to be well-capitalized, even in scenarios that are materially worse than the typical “severely adverse” scenario that the Fed normally uses. This supports our overall thesis, which is that the banks are much better positioned and will be much harder to break this time around. Our base case has been that most banks will be able to maintain their dividends, and we think the latest disclosures support this thesis as well. Based on the released results, we calculate that a select few banks may need to cut their dividends after third-quarter results, including CapitalOne (we think a 100% cut), Wells Fargo (we think less than 100%), and Comerica (we think less than 100%); however, we think the majority will be fine. Banks will have to resubmit their capital plans later in the year, and the Fed has said it will continue to monitor the economic downturn as it develops, so this will remain an active situation with more updates and changes to come. There is still a high degree of uncertainty around the future economic state and what future credit costs will be, but we are generally encouraged by today’s results.
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