Stress Test results

[valueinvesting101]

To declare early or not that's the question:

 

http://www.bloomberg.com/news/2013-03-07/banks-said-to-weigh-defying-fed-with-dividend-disclosures.html

 

Sure these things will leak. Plus it will be difficult find out insider trading as many people taking position might well be trading in these stocks for some time and huge volume this event is expected to create.

[racemize]

oh man, that title made me think you had them!

 

now I'm sadface.

[Liberty]

oh man, that title made me think you had them!

 

now I'm sadface.

 

Same here. Oh well, patience is a virtue...

[wescobrk]

So far no leaks. Jp leaked last year. I believe they are getting ccar results in private today. Is that correct? Public ccar is next thurs of course.

[wescobrk]

17 of 18 passed only ally failing (no link saw flash frombloomberg)

[jay21]

You can read the results here:

 

http://www.federalreserve.gov/newsevents/press/bcreg/DFAST_2013_results_20130307.pdf

[fareastwarriors]

.BREAKING NEWSFed Stress Tests Show 17 of 18 Banks Weathering Severe Recession Fed Stress Tests Show 17 of 18 Banks Weathering Severe Recession

By Craig Torres & Joshua Zumbrun - Mar 7, 2013 1:30 PM PT ..Facebook Share LinkedIn Google +1 0 Comments

Print QUEUEQ..The Federal Reserve said 17 of the 18 largest U.S. banks could withstand a deep recession and maintain capital above a regulatory minimum.

 

Only Ally Financial Inc. (ALLY), the auto lender majority-owned by U.S. taxpayers, fell below a 5 percent Tier 1 common ratio, a regulatory minimum and measure of financial strength, according to data released today by the central bank in Washington. Morgan Stanley (MS) showed a minimum Tier 1 common ratio of 5.7 percent in the test, and Goldman Sachs Group Inc. (GS) showed a ratio of 5.8 percent.

 

“The stress tests are a tool to gauge the resiliency of the financial sector,” Fed Governor Daniel Tarullo said in a statement. “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”

 

Since the 2008-2009 financial crisis, U.S. regulators have tried to minimize the odds of another taxpayer rescue, compelling U.S. banks to retain some earnings and reinforce their buffers against possible losses. With the economy in the fourth year of expansion, banks are benefitting from a housing market rebound, falling mortgage delinquencies and record-low short-term interest rates that boost earnings.

 

Projected losses for the 18 banks under a scenario of deep recession and peak unemployment of 12.1 percent would total $462 billion over nine quarters, the Fed said. The aggregate Tier 1 common capital ratio would fall from an actual 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014. The firms represent about 70 percent of the assets in the U.S. banking system.

 

Not Forecasts

The Fed said in a release that the “projections should not be interpreted as expected or likely outcomes for these firms, but rather as possible results under hypothetical, severely adverse conditions.” A Fed official said on a conference call with reporters that the severely adverse scenario represents a financial calamity of greater magnitude than any two-year period in the last 100 years except for the Great Depression.

 

The biggest sources of losses are those “on the accrual loan portfolios and trading and counterparty losses from the global market shock,” the Fed said in its release. “Together, these two account for nearly 90 percent of the projected losses” for the 18 banks under the severely adverse scenario.

 

“We are entering this year with a stronger capital base and we are further through the credit cycle,” so fewer loans are going bad, said R. Scott Siefers, a managing director at Sandler O’Neill & Partners in New York. “Even though banks are paying out more of their earnings than a couple of years ago, there has still been an increase in retained earnings,” which bolsters capital.

 

Second Test

The Fed on March 14 will release results of a second stress test that focuses on the lenders’ capital plans, assessing how dividend or share-buyback increases would affect them. The central bank that day will inform banks whether they can increase payouts. Today’s test results don’t forecast results for next week’s test, the Fed official said on the conference call, because the Dodd-Frank stress test doesn’t include forward-looking management decisions.

 

The KBW Bank Index (KBX), which tracks shares of 24 large U.S. banks such as JPMorgan Chase & Co. (JPM), State Street Corp. (STT) and Capital One Financial Corp. (COF), has risen 9.7 percent this year, compared with the 8.3 percent gain of the Standard & Poor’s 500 Index.

 

Capital Doubled

The Fed said in November the largest banking groups had nearly doubled their Tier 1 common capital to $803 billion in the second quarter of last year from $420 billion in the first quarter of 2009.

 

The Fed derived the results today by following stress test guidelines in the Dodd-Frank Act, with bank dividends held constant and share buybacks or issuance not considered. The test is aimed at providing a standardized comparison of how bank capital fares during a deep recession.

 

“There needs to be much more market discipline over capital requirements,” said Hal Scott, a Harvard Law School professor and director of the Committee on Capital Markets Regulation, a research group of academics and industry leaders.

 

“What the stress test disclosure does is give markets much more information than they have had about the possibility of banks dealing with situations on a comparative basis,” Scott said. Bloomberg LP Chief Executive Officer Daniel Doctoroff is a member of the committee.

 

Severely Adverse

The Fed’s March 14 Comprehensive Capital Analysis and Review will be a more detailed test that incorporates forward- looking capital decisions of bank managers and requires financial institutions to meet specific criteria to pass. Both tests apply the same so-called severely adverse scenario, which subjects the loan and securities portfolios of banks with the shocks of a recession and soaring unemployment.

 

The Tier 1 common ratio measures a bank’s core equity, made up of common shares and retained earnings, divided by its total assets adjusted for risk using global banking guidelines. The ratio grew especially important during the financial crisis as investors applied extreme mark-downs on bank portfolios to see whether firms had enough core equity to absorb additional losses or the potential for balance sheet growth.

 

Test Variables

The Fed for the test gave banks 26 variables -- ranging from interest rates to stock and home-price indexes -- and showed how they would change through a baseline, adverse and severely adverse scenario.

 

Under the most adverse scenario, U.S. gross domestic product doesn’t grow or contracts for six consecutive quarters. Unemployment peaks at 12.1 percent, and real disposable income falls for five consecutive quarters. Stock prices tumble 52 percent, and house prices fall 21 percent.

 

This year’s CCAR for the first time provides banks with an early look at how they performed under the analysis, giving them a chance to revise their capital plans. If their capital can withstand those conditions without pushing ratios below regulatory levels, and if their analysis is rigorous enough, the Fed signs off.

 

The Fed conducted its first stress test in 2009, aimed at restoring confidence in banks by showing worst-case losses. In 2011, the central bank adopted a new approach to the tests that focused on banks’ plans for capital.

 

“The point is to bar capital distributions from under- capitalized or risk-prone bank holding companies, which happened a lot, with full Federal Reserve Board approval, even as the crisis was clearly revving up,” said Karen Shaw Petrou, co- founder of Federal Financial Analytics, a Washington firm that specializes in financial regulation analysis.

 

The 19 largest banks in 2007 paid out more than $43 billion in dividends as housing prices continued their fall, and an additional $39 billion in 2008 as the crisis began to accelerate, Patrick Parkinson, the former head of the Fed Board’s supervision and regulation division said in 2011. He is now a managing director at Promontory Financial Group LLC.

 

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.

 

 

[fareastwarriors]

http://www.businessweek.com/articles/2013-03-07/federal-reserves-stress-testing-is-politics-not-math

[treasurehunt]

Minimum Tier 1 common ratios according to the 2012 and 2013 stress tests.

 

          2012    2013

BofA      5.7%    6.8%

Citi      5.9%    8.3%

JPM      6.3%    6.3%

Goldman  5.8%    5.8%

MS        5.4%    5.7%

Wells    6.6%    7.0%

Big improvements for BofA and Citi. These two should be returning large amounts of capital soon, perhaps starting in 2014.

 

JPM and Goldman have identical numbers in 2012 and 2013. But both were allowed to return a lot of capital last year, and presumably a similar capital return will be permitted this year as well.

[hyten1]

folk has anyone look at http://www.federalreserve.gov/newsevents/press/bcreg/DFAST_2013_results_20130307.pdf

 

on page 21, which has "Projected losses, revenues, and net income before taxes for 18 participating bank holding companies

Federal Reserve estimates in the severely adverse scenario"

 

anyone have any comments, BAC's net income before taxes is -51bil (in this severe adverse scenario).

 

which doesn't bode well for capital return, this the fed base their decision on this

[ERICOPOLY]

folk has anyone look at http://www.federalreserve.gov/newsevents/press/bcreg/DFAST_2013_results_20130307.pdf

 

on page 21, which has "Projected losses, revenues, and net income before taxes for 18 participating bank holding companies

Federal Reserve estimates in the severely adverse scenario"

 

anyone have any comments, BAC's net income before taxes is -51bil (in this severe adverse scenario).

 

which doesn't bode well for capital return, this the fed base their decision on this

 

I'm going to sound like a broken record, but it's not just how much capital you hold, it's your earnings power that matters at least as much.

 

Bathtub water level.  Rate in versus rate out.  Remember differential equations?

 

Once you get yourself buried under a pile of loan loss provisions, how fast can you rebuild your capital?  Only thing that matters here is your earnings power.  Wells Fargo might get dragged down to a 7% capital ratio, but they'll bounce back 100 bps of capital real fast.  "I get knocked down, but I get up again, you're never going to keep me down".

 

This, I believe, is what Moynihan is talking about when he says regulators want to see regular and recurring earnings.

 

 

 

[ERICOPOLY]

I also want them to get rejected/discouraged from returning much capital (it was a change of heart).  I have so much in BAC that I want them to be a safer ride until their earnings power is restored (which will bring up and keep up the stock price).  As I said earlier in the week, a little capital return today versus in a year or two matters little to the intrinsic value.

 

Maybe the market would also like them to be safer -- these banks never actually lost that much in the financial crisis... what hurt shares (more than losses) was the dilution at low prices.  Market should be afraid of dilution above all else if they've learned anything.

 

[hyten1]

http://online.wsj.com/article/SB10001424127887324582804578346710363561582.html?ru=yahoo&mod=yahoo_hs

[hyten1]

eric i agree with your reasoning

[dowfin1]

Differences in results of the Fed-run stress tests against those conducted by the banks are likely to raise questions among regulators when deciding how much excess capital they will allow the banks to return to shareholders.

 

In November, the Fed said it was judging the adequacy of banks’ capital plans partly based on whether the banks had “effective” processes for estimating potential revenues, losses and capital needs. Large variations between bank-run tests and those at the Fed may call into question banks’ abilities to manage risk.

 

http://www.ft.com/intl/cms/s/0/d3ba26ae-8754-11e2-9dd7-00144feabdc0.html#axzz2MmITy7Gx

 

 

Comparing the FED and BAC's results, the major difference is pre-provision revenue:

FED - $24.1b  vs.  BAC -  $38.5b

 

I suspect there is a fundamental difference in assumptions between the FED model and BAC's to account for this, and that it could be viewed by the FED as an internal risk management problem.

 

Personally, I hope there is another opportunity to buy at lower prices if capital return to shareholders is stingy.

[fareastwarriors]

http://dealbook.nytimes.com/2013/03/07/feds-stress-tests-point-to-banks-improving-health/?ref=business

 

Banks Pass Fed’s Tests; Critics Say It Was Easy

 

 

 

 

[Liberty]

http://www.bloomberg.com/news/2013-03-08/fed-sees-goldman-jpmorgan-overvaluing-capital-strength.html

 

Fed Sees Goldman, JPMorgan Overvaluing Capital Strength

[ubuy2wron]

Eric, The comment on dilution I learned the hard way, it is what has kept me out of the European banks so far. The US banks that had to do major dilution have not yet recovered fully. You are a smart and lucky guy.

[SharperDingaan]

ubuy2wron:

 

It is highly likely that we will see at least 1 new UK bank before year-end, with the right kind of dilution ;) It would seem that the outgoing governor is telegraphing the intent to break up RBS, & do it by moving retail depositors to new banks that have none of the Lloyds, Barclays issues, etc. Now if you can open up a new & unencumbered UK bank, with less capital, & favourable growth prospects - where do you think that incremental 'bank' investment is going to go? And do you really think the incoming governor is going to tolerate status-quo ?

 

http://www.telegraph.co.uk/finance/newsbysector/epic/rbs/9912988/Sir-Mervyn-King-there-is-a-case-for-breaking-up-RBS.html

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9897568/FSA-to-slash-capital-requirements-for-new-banks.html

[racemize]

General question/something I noticed on this year's stress tests:

 

First, I'm largely referring to JPM/WFC, which are a few years ahead of BAC on dividends and buybacks.  Both of these companies stress test capital levels did not change much from last year.  At the same time, they are at the Basel III requirements of capital levels already. 

 

Doesn't this seem to imply that they can't increase buybacks/dividends as much--i.e., if they had paid out more last year, they would have done worse than last year (in terms of capital levels) in the current stress tests?  At the same time, they did increase their Basel III requirements, so these tests seem to be harder to meet than the Basel III requirements everyone was fixated on.  Am I off base here?

 

Offsetting that, the banks had very different estimates of the stress test results, so perhaps it is just that the regulators decided to go ultra-conservative on these tests (as opposed to last year, perhaps) and we will see improvement in the coming years.