By Manya Saini
(Reuters) -U.S. bank stocks rose on Thursday after the Federal Reserve’s annual health checks showed lenders could weather an economic slump, easing investor fears after Silicon Valley Bank and two other lenders failed this year.
But analysts remained skeptical that the strong performance would lead to bigger dividends and share buybacks, citing looming new regulations and fears about the economic outlook.
“With the recent banking crisis driving banks to be more conservative…, we see share buyback activity as being limited for the remainder of 2023,” RBC Capital Markets analysts wrote.
Some investors warned that the checks, which “stress tested” 23 of the largest lenders, did not paint a full picture of the country’s vast banking system, including many mid-sized lenders that had liquidity problems this year.
“It’s not the 23 largest banks that were tested that people are worried about. It’s the more than 4,000 smaller banks that people are curious about,” said Brian Jacobsen, Chief Economist, Annex Wealth Management, Menomonee Falls, Wisconsin.
Shares of the top performer in the test, Charles Schwab, rose 2.1%.
Big banks JPMorgan Chase, Wells Fargo, Morgan Stanley, Goldman Sachs and Bank of America gained between 1.2% and 3.36% on Thursday afternoon.
Under the annual test established following the 2007-2009 financial crisis, the Fed assesses how banks’ balance sheets would fare against a hypothetical economic crash.
It found the lenders would suffer a combined $541 billion in losses under the Fed’s severe downturn scenario – one of its toughest yet – but would still have over twice the amount of capital required to absorb loan losses.
The S&P 500 bank index was up 2.0%, on track for its biggest daily percentage gain since June 2. The KBW regional banking index also added 2.1%.
The test dictates how much capital banks must hold and how much cash they can give back to investors. Lenders are expected to release capital plans after trading on Friday.
Analysts warned investors should not expect a payout bonanza, noting the Fed is due to roll out stiff new capital rules.
“Upcoming regulations will likely lead to higher capital requirements for all banks above $100 billion of assets,” said analysts at Jefferies, adding that many banks have already pulled back on capital return.
Citigroup rose 0.17%, but trailed its peers as analysts said a higher capital buffer would hamper efforts to boost profitability. Well Fargo expects a reduction in the capital requirements for JP Morgan, BofA and Goldman.
Bank of New York Mellon, State Street rose between 0.73% and 0.77%, respectively.
SPOTLIGHT ON SMALLER BANKS
This year’s test follows turmoil in the banking sector as some lenders found themselves on the wrong end of Fed interest rate hikes, suffering large unrealized losses on U.S. Treasury bond holdings which spooked uninsured depositors.
Many mid-sized and regional lenders posted some of the lowest capital cushions but managed to stay above required capital levels.
Shares of regional U.S. banks also were mostly higher. M&T Bank was up 1.5% and PNC Financial rose 1.3%. Citizens Financial shares rebounded from early session losses, gaining 0.16%, after J.P. Morgan analysts downgraded the stock to ‘neutral’ citing an increase in capital requirements could hurt profitability.
Overall, U.S. banks have recently regained some ground.
The KBW Regional Banking Index added 1.54%. The index has recovered 6.04% this month, but still remains down 24.5% for the year.
(Reporting by Manya Saini in Bengaluru; Additional reporting by Niket Nishant, Chibuike Oguh and Chuck Mikolajczak; Editing by Arun Koyyur, Michelle Price and David Gregorio)
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