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4 Bank Stocks to Watch Following Fed's Stress Test Results
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The U.S. Federal Reserve released the results for its second round of stress test this year on Dec 18 wherein it relaxed current restrictions on distribution which augur well for profitable large banks. Following its assessment, the Fed has allowed banks, for the first quarter of 2021, to pay dividends and engage in share repurchases but they “will be limited to an amount based on income over the past year.”
The Fed conducted the stress test to ensure that the large banks are able to provide the much-needed support to the economy. Under the previous stress test earlier this year, it had found that even though banks generally had strong levels of capital, there were risks for such lenders amid considerable economic uncertainty. This led the Fed to put several restrictions in place which included the suspension of share buybacks as well as limiting dividends. Notably, the restrictions allowed large banks to build capital despite having to set aside $100 billion in loan loss reserves.
In the second stress test, the Fed evaluated their resilience by considering two hypothetical scenarios. Under the first scenario, it considered a situation in which the unemployment rate jumped to 12.5% and then fell to around 7.5%. Under the second scenario, the Fed considered an unemployment rate of 11% which would be followed by a modest decline to 9%. Notably, it found that under both scenarios, in a collective manner, large banks would have total losses of more than $600 billion, an amount which is considerably higher than that estimated during the earlier stress test this year. Nonetheless, under the more severe scenario, banks would see their capital ratios declining to 9.6% from an average starting point of 12.2%. This would still be well above the minimum risk-based capital ratio requirement of 4.5%.
Highlighting the resilience displayed by large banks, Vice Chair for Supervision Randal K. Quarles said that the results confirmed that “large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy.”
Moreover, the Fed stated that it would not adjust the capital requirements currently. But the modifications in restrictions will allow large banks to preserve capital while also allowing them to keep on lending to households and businesses.
4 Top Banks to Watch
The second stress test results highlighted how resilient the banking sector has been despite the challenges posed by the pandemic. Large banks seem poised to weather any adverse economic downturn owing to strong levels of capital. Moreover, the loosening of restrictions will also allow them to engage in shareholder payouts as well as share buybacks in a limited manner. This makes it a good time to keep an eye on fundamentally sound bank stocks that can make the most of the positive development. Notably, we have handpicked four such stocks that carry a Zacks Rank #2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
JPMorgan Chase & Co. (JPM - Free Report) operates as a financial services company in the United States. It operates under four segments, namely, Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings increased 25.5% over the past 90 days. The company’s expected earnings growth rate for next year is 18.1%.
Bank of America Corporation (BAC - Free Report) , through its subsidiaries, provides banking and financial products and services for individual consumers, small- and middle-market businesses, institutional investors, large corporations, and governments worldwide. The company currently has a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings increased 9.9% over the past 90 days. The company’s expected earnings growth rate for next year is 14.1%.
Fifth Third Bancorp (FITB - Free Report) operates as a diversified financial services company in the United States. The company's Commercial Banking segment offers credit intermediation, cash management and financial services, among others. It currently has a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings increased 16.6% over the past 60 days. The company’s expected earnings growth rate for next year is 20.5%.
Citigroup Inc. (C - Free Report) is a diversified financial services holding company that provides various financial products and services to consumers, corporations, governments, and institutions in the United States. The company currently has a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings increased 39.1% over the past 90 days. The company’ expected earnings growth rate for next year is 31%.
Zacks Top 10 Stocks for 2021
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.
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4 Bank Stocks to Watch Following Fed's Stress Test Results
The U.S. Federal Reserve released the results for its second round of stress test this year on Dec 18 wherein it relaxed current restrictions on distribution which augur well for profitable large banks. Following its assessment, the Fed has allowed banks, for the first quarter of 2021, to pay dividends and engage in share repurchases but they “will be limited to an amount based on income over the past year.”
The Fed conducted the stress test to ensure that the large banks are able to provide the much-needed support to the economy. Under the previous stress test earlier this year, it had found that even though banks generally had strong levels of capital, there were risks for such lenders amid considerable economic uncertainty. This led the Fed to put several restrictions in place which included the suspension of share buybacks as well as limiting dividends. Notably, the restrictions allowed large banks to build capital despite having to set aside $100 billion in loan loss reserves.
In the second stress test, the Fed evaluated their resilience by considering two hypothetical scenarios. Under the first scenario, it considered a situation in which the unemployment rate jumped to 12.5% and then fell to around 7.5%. Under the second scenario, the Fed considered an unemployment rate of 11% which would be followed by a modest decline to 9%. Notably, it found that under both scenarios, in a collective manner, large banks would have total losses of more than $600 billion, an amount which is considerably higher than that estimated during the earlier stress test this year. Nonetheless, under the more severe scenario, banks would see their capital ratios declining to 9.6% from an average starting point of 12.2%. This would still be well above the minimum risk-based capital ratio requirement of 4.5%.
Highlighting the resilience displayed by large banks, Vice Chair for Supervision Randal K. Quarles said that the results confirmed that “large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy.”
Moreover, the Fed stated that it would not adjust the capital requirements currently. But the modifications in restrictions will allow large banks to preserve capital while also allowing them to keep on lending to households and businesses.
4 Top Banks to Watch
The second stress test results highlighted how resilient the banking sector has been despite the challenges posed by the pandemic. Large banks seem poised to weather any adverse economic downturn owing to strong levels of capital. Moreover, the loosening of restrictions will also allow them to engage in shareholder payouts as well as share buybacks in a limited manner. This makes it a good time to keep an eye on fundamentally sound bank stocks that can make the most of the positive development. Notably, we have handpicked four such stocks that carry a Zacks Rank #2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
JPMorgan Chase & Co. (JPM - Free Report) operates as a financial services company in the United States. It operates under four segments, namely, Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings increased 25.5% over the past 90 days. The company’s expected earnings growth rate for next year is 18.1%.
Bank of America Corporation (BAC - Free Report) , through its subsidiaries, provides banking and financial products and services for individual consumers, small- and middle-market businesses, institutional investors, large corporations, and governments worldwide. The company currently has a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings increased 9.9% over the past 90 days. The company’s expected earnings growth rate for next year is 14.1%.
Fifth Third Bancorp (FITB - Free Report) operates as a diversified financial services company in the United States. The company's Commercial Banking segment offers credit intermediation, cash management and financial services, among others. It currently has a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings increased 16.6% over the past 60 days. The company’s expected earnings growth rate for next year is 20.5%.
Citigroup Inc. (C - Free Report) is a diversified financial services holding company that provides various financial products and services to consumers, corporations, governments, and institutions in the United States. The company currently has a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings increased 39.1% over the past 90 days. The company’ expected earnings growth rate for next year is 31%.
Zacks Top 10 Stocks for 2021
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.
Start Your Access to the New Zacks Top 10 Stocks >>