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U.S. Banks Clear Stress Test: Financial ETFs in Focus
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The results of the much-awaited Federal Reserve's stress test of the big banks' financial health indicate a brighter picture despite regulatory stringency. The test – first undertaken in 2009 after the fall of big financial institutions like Lehman Brothers and American International Group, Inc. – is a tool used by the financial regulators to measure whether the Wall Street banks are sound enough to endure extreme economic upheaval in the future.
Inside Stress Test Results
In the latest review, each of the 33 U.S. banks cleared the Fed test, indicating that the vast majority of the country’s largest financial institutions have the minimum capital levels required to combat severe chaos in the economy and market. As per Reuters, the banks had to show larger losses, however, “including $113 billion in trading losses for the eight biggest firms.”
Going by an article in Reuters, 33 banks would incur $385 billion in loan losses over nine quarters even in an extreme case, per the Fed. Overall, “a key ratio measuring high-quality capital against risk-weighted assets, known as the Tier 1 common equity ratio”, would be 8.4%, which is way higher than the 4.5% minimum requirement set by regulators, according to the source.
Wall Street Reaction
Backed by elevated capital, an improving credit quality and reducing bad debt, banks have lived up to the expectations of the Fed as well as analysts. In fact, it grappled with the test bar that the Fed is raising every year.
In January, the Fed added negative interest rates – something most developed economies are practicing now to fight recessionary threats – to its test criteria. So, the Fed had to ensure how well the banks would perform if the U.S. economy confronts such a situation. Most analysts appeared satisfied with banks’ present capital and liquidity.
Market Performance
As per sources, Citigroup (C - Free Report) ’s Tier 1 common equity ratio expanded to 9.2% from 6.8% and its Tier 1 leverage ratio improved to 6.9% from 4.6%. JPMorgan Chase & Co’s (JPM - Free Report) Tier 1 common equity ratio shot up to 8.3% from 6.3%. Citigroup’s stock jumped about 4.2% on such stellar results and added about 1% after hours on June 23, 2016. JPMorgan’s shares rose over 2.1% on June 23, 2016 while it lost about 0.4% after hours.
Wells Fargo (WFC - Free Report) shares gained about 2% while it shed about 0.02% after hours. Morgan Stanley (MS - Free Report) was yet another big beneficiary, having added over 3.4% in the key trading sessions. Goldman Sachs (GS - Free Report) advanced over 3%, but has lost about 0.1% after hours.
Should You Buy Financial ETFs?
With “Brexit” wining the referendum throwing aside ‘Bremain”, the coming few days are likely to be choppy for overall investing. However, after the panic-induced sell-offs settle down, the financial sector should be on fire (read: 6 Sector ETFs Threatened by Brexit Uncertainty).
This is especially true given that the oil price plunge is overdone now and the energy sector is on its way to recovery. Notably, U.S. banks have significant exposure to the long-beleaguered energy sector where chances of credit default are pretty high (read: Earnings or Oil--What Will Drive Financial ETFs Ahead?).
ETFs to Benefit
Overall, the banks look good and so does the financial sector at large. For an ETF approach, one can add any of the financial funds mentioned below for a diversified exposure to the sector (see all Financials ETFs).
Investors can take a look at PowerShares KBW Bank ETF (KBWB - Free Report) , iShares US Financial Services (IYG - Free Report) and Financial Select Sector SPDR ETF (XLF - Free Report) .These three ETFs have considerable exposure in Citigroup and J P Morgan. Alternatively, investors seeking an exposure to financial ETFs heavy on Morgan Stanley and Goldman may try out iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) .
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U.S. Banks Clear Stress Test: Financial ETFs in Focus
The results of the much-awaited Federal Reserve's stress test of the big banks' financial health indicate a brighter picture despite regulatory stringency. The test – first undertaken in 2009 after the fall of big financial institutions like Lehman Brothers and American International Group, Inc. – is a tool used by the financial regulators to measure whether the Wall Street banks are sound enough to endure extreme economic upheaval in the future.
Inside Stress Test Results
In the latest review, each of the 33 U.S. banks cleared the Fed test, indicating that the vast majority of the country’s largest financial institutions have the minimum capital levels required to combat severe chaos in the economy and market. As per Reuters, the banks had to show larger losses, however, “including $113 billion in trading losses for the eight biggest firms.”
Going by an article in Reuters, 33 banks would incur $385 billion in loan losses over nine quarters even in an extreme case, per the Fed. Overall, “a key ratio measuring high-quality capital against risk-weighted assets, known as the Tier 1 common equity ratio”, would be 8.4%, which is way higher than the 4.5% minimum requirement set by regulators, according to the source.
Wall Street Reaction
Backed by elevated capital, an improving credit quality and reducing bad debt, banks have lived up to the expectations of the Fed as well as analysts. In fact, it grappled with the test bar that the Fed is raising every year.
In January, the Fed added negative interest rates – something most developed economies are practicing now to fight recessionary threats – to its test criteria. So, the Fed had to ensure how well the banks would perform if the U.S. economy confronts such a situation. Most analysts appeared satisfied with banks’ present capital and liquidity.
Market Performance
As per sources, Citigroup (C - Free Report) ’s Tier 1 common equity ratio expanded to 9.2% from 6.8% and its Tier 1 leverage ratio improved to 6.9% from 4.6%. JPMorgan Chase & Co’s (JPM - Free Report) Tier 1 common equity ratio shot up to 8.3% from 6.3%. Citigroup’s stock jumped about 4.2% on such stellar results and added about 1% after hours on June 23, 2016. JPMorgan’s shares rose over 2.1% on June 23, 2016 while it lost about 0.4% after hours.
Wells Fargo (WFC - Free Report) shares gained about 2% while it shed about 0.02% after hours. Morgan Stanley (MS - Free Report) was yet another big beneficiary, having added over 3.4% in the key trading sessions. Goldman Sachs (GS - Free Report) advanced over 3%, but has lost about 0.1% after hours.
Should You Buy Financial ETFs?
With “Brexit” wining the referendum throwing aside ‘Bremain”, the coming few days are likely to be choppy for overall investing. However, after the panic-induced sell-offs settle down, the financial sector should be on fire (read: 6 Sector ETFs Threatened by Brexit Uncertainty).
This is especially true given that the oil price plunge is overdone now and the energy sector is on its way to recovery. Notably, U.S. banks have significant exposure to the long-beleaguered energy sector where chances of credit default are pretty high (read: Earnings or Oil--What Will Drive Financial ETFs Ahead?).
ETFs to Benefit
Overall, the banks look good and so does the financial sector at large. For an ETF approach, one can add any of the financial funds mentioned below for a diversified exposure to the sector (see all Financials ETFs).
Investors can take a look at PowerShares KBW Bank ETF (KBWB - Free Report) , iShares US Financial Services (IYG - Free Report) and Financial Select Sector SPDR ETF (XLF - Free Report) .These three ETFs have considerable exposure in Citigroup and J P Morgan. Alternatively, investors seeking an exposure to financial ETFs heavy on Morgan Stanley and Goldman may try out iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) .
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>