By US banks are anticipating the publication of the Federal Reserve’s annual stress test results, with bank stocks rising in advance. The first half of 2021 has been challenging for the sector, following the collapse of three regional banks this year.
The tests will assess the strength of bank balance sheets and make appropriate tweaks to preserve adequate capital for long-term security. Following the tests, dividend and stock buyback plans will be clearer.
“We expect the Fed will praise the overall strength of the banking system while warning of potential hazards ahead,” said Ian Katz of Capital Alpha Partners.
This year’s stress tests occur after regional banking instability following the collapse of Silicon Valley Bank, Signature Bank, and First Reserve Bank. Moreover, banks face significant regulatory changes regarding capital, liquidity, and debt funding.
After conducting stress tests, Michael Barr, Fed Vice Chair for Supervision is expected to signal tougher tests to come in 2024 by potentially lowering the threshold for annual stress testing to banks with at least $100 billion in assets.
“The Fed looked a bit behind the times by not having more rigorous testing for a rising interest rate environment, and it will try to fix that,” Katz said. “It will also address concerns about bank liquidity.”
As anticipation grows in banking circles, KBW Nasdaq Bank Index rose to 1.32% on Tuesday. SPDR S&P Bank exchange-traded fund followed, surging by 2.2%, the Financial Select SPDR ETF increased by 0.8%, while SPDR S&P Regional Banking ETF rose by 2.5%.
Bank Stocks Could Be Under Pressure as Regulatory Hurdles Increase
Some banks may have to increase their stress capital buffers while stock buybacks and dividends may be under pressure, according to a report by J.P. Morgan analyst Vivek Juneja. Juneja stated that bank stocks may remain uncertain in the near term due to the trifecta of factors: a slowdown in earnings with a likely decline in 2024; an increase in regulatory requirements which would add pressure to both earnings and capital; and the potential for a recession which would further hurt earnings. Although investment banking activity saw some “green shoots,” trading revenue fell amid volatility.
Price Targets
Juneja cut several bank price targets including Bank of America’s (BAC) target price from $32.50 to $31, while Citigroup Inc.’s (C) price target was reduced from $53 to $50.50 and Wells Fargo & Co.’s (WFC) price target decreased by $1 to $42. Other reduced targets included U.S. Bancorp to $35 from $36.50, Truist Financial to $32.50 from $34, and PNC Financial to $132 from $138. Citizens Financial Group’s (CFG) target was cut by $2.50 to $29 while Fifth Third Bancorp’s (FITB) price target was reduced from $28.50 to $27 and Regions Financial’s (RF) price target was lowered to $19.50 from $20.
Conclusion
With regulatory requirements increasing, bank stocks may be under pressure in the near term. Although, there are signs of hope with some investment banking activities beginning to show positive growth, trading revenue has fallen due to the increasing volatilities in the market.
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