Banks rally after stress test, Bank of America underperforms

June 24 (Reuters) – Shares of some of the biggest U.S. banks rallied on Friday after passing the Federal Reserve’s annual health check, but Bank of America (BAC.N) underperformed with test results implying that it needs more buffer capital than expected, which could limit share buybacks and dividends.

As the broader stock market also rallied on Friday, Wells Fargo & Co (WFC.N), up 7.8%, was the biggest gainer among 34 lenders who suffered the so-called Fed stress test, which measures how well they would fare in a hypothetical severe economic downturn. Read more

The group would have about twice the capital required under Fed rules in the downturn scenario, he said.

“The big picture is that banks are extremely well capitalized and could be fine in a downturn,” said David Konrad, analyst at Keefe, Bruyette & Woods.

But the results implied a wide variation in the size of banks’ stress capital buffers (SCBs) – an extra layer of capital that banks must hold to cover potential losses and support their day-to-day operations that the Fed will set in weeks. coming.

Bank of America Corp (BAC.N), Citigroup Inc (CN) and JPMorgan Chase & Co (JPM.N).

Shares of all three banks underperformed on Friday, with Konrad saying their “repurchases will need to be adjusted significantly lower.”

Without specifying a time frame, he estimated that the buyback adjustments would result in lower earnings per share of 5% for Bank of America, and 2% for JPMorgan and Citi.

Investors in Wells Fargo were showing relief as its stress capital buffer is expected to remain nearly flat from a year ago, he said.

Shares of Bank of America Corp rose 1.4%, Citigroup Inc (CN) 3.9% and JPMorgan Chase & Co (JPM.N) 3.0%.

Credit Suisse analyst Susan Roth Katzke said “the magnitude of the SCB increases concentrated on a few” was an unpleasant surprise. She pointed to expected SCB increases for Bank of America, Citi and JPMorgan.

Roth Katzke also highlighted expected SCB increases for Bank of America, Citi and JPMorgan.

“On average across our banks, higher SCBs translate to less excess capital — less excess, but generally sufficient, if not sufficient, capital,” the analyst said.

US units of foreign banks performed well. Read more

US shares of UBS Group AG last rose 6.3%, while Credit Suisse rose 5.4%. Other strong performers included Ally Financial (ALLY.N) up 6.0% and Discover Financial Services (DFS.N) up 5.7%.

Reporting by Sinéad Carew, Elizabeth Dilts Marshall and Pete Schroeder; edited by Jonathan Oatis, Michelle Price and Richard Chang

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