Shares of the biggest U.S. banks went up on Friday after they passed the Federal Reserve’s annual health check. However, Bank of America (BAC.N) didn’t meet expectations because the test results showed it needed a bigger capital cushion than expected. This could limit share buybacks and profits.
Even though the stock market as a whole moved up on Friday, Wells Fargo & Co. (WFC.N), which went up 7.5 percent, was the best performer among the 34 banks that went through the Fed’s so-called “pressure test,” which tries to predict how they would charge in a speculative financial slump.
It was said that the meeting would have had about twice as much money as expected if there had been a recession.
David Konrad, an expert at Keefe, Bruyette, and Woods, said, “The big picture is that banks are doing very well and could ride out a recession” (KBW).
But the results showed that there was a big difference in how big banks’ pressure capital cushions (SCB) should be. SCBs are an extra layer of capital that banks should hold to cover possible misfortunes and support their everyday business. The Fed will soon decide how big SCBs should be.
Bank of America, Citigroup Inc (C.N), and JPMorgan Chase & Co (JPMorgan Chase) were all expected to require additional pressure capital support.However, their parts did not meet expectations on Friday.
Betsy Graseck, a researcher at Morgan Stanley, said that Bank of America, Citi, and JPMorgan Chase might have to keep profits the same and sell buybacks.
Because of these changes, Bank of America’s profit per share is likely to go down by 1% to 2%, said Graseck, who changed her price target for the stock from $49 to $47.
She thought that the change in Citi’s EPS would be between 1% and 5%, so she lowered her price target for that stock from $60 to $57.
She thought that JPMorgan’s earnings per share (EPS) would fall by 1% to 2%, so she lowered her cost target from $152 to $149.
Konrad from KBW also thought that the “buybacks” of the three banks should be physically changed so that they go down.
He thinks that the changes to the buybacks will cut EPS by about 5% at Bank of America and about 2% at both JPMorgan and Citi.
Wells Fargo’s financial backers were feeling better because their pressure capital support should stay almost the same as it was last year.
Bank of America shares went down for the day, while Citigroup shares went up 3.3% and JPMorgan shares went up 3.0%. The broader S&P 500 financial management index (.SPSY) finished the day up 3.8 percent.
The U.S. branches of banks that people don’t know well did well.
UBS Group AG lost 6% for the day, but Credit Suisse gained 5.5 %. Ally Financial (ALLY.N), which went up 5%, and Discover Financial Services (DFS.N), which went up 5.4%, were also good performers.