US banks suffer steeper losses, but retain large cushions in annual Fed health check (updated)

Vita Resources NL

26/06/2024 22:25

(Adds analyst comment in paragraph 5, industry statement in
paragraph 12, additional details in paragraphs 13-18)
    By Pete Schroeder and Nupur Anand
       WASHINGTON, June 26 (Reuters) - The biggest U.S. banks
would have enough capital to withstand severe economic and
market turmoil, the Federal Reserve's annual "stress test"
exercise showed on Wednesday, but firms faced steeper
hypothetical losses this year due to riskier portfolios.
    The exercise found 31 big banks would weather a spike in the
jobless rate, severe market volatility, and dives in the
residential and commercial mortgage markets and still retain
enough capital to continue lending. 
    Specifically, the Fed found levels of high-quality capital
at the banks would dip to 9.9% at their lowest levels, which is
more than twice the regulatory minimum.
    The relatively clean bill of health clears the way for the
banks to announce capital plans to shareholders in the coming
days, including stock buybacks and dividends. Banks can announce
capital plans after the market closes on Friday, a senior Fed
official said.
        "We are positively surprised with the results as we
expected losses to be slightly higher compared to the last few
years, especially in areas such as commercial real estate," said
Chris Marinac, director of research at financial adviser Janney
Montgomery Scott. "This shows that the banks are in good
health."
  
    However, the test did find banks suffered steeper losses
this year. The 2024 version of the stress test was broadly
similar to last year's, and the Fed said the higher losses were
due to how bank portfolios have shifted.
    The banks that were tested would suffer a combined $685
billion in losses under a hypothetical severe scenario. On
average, banks saw their capital ratios fall by 2.8 percentage
points, the steepest decline since 2018.
    Of the banks tested, Charles Schwab Corp reported the
highest capital levels under the test, posting a 25.2% capital
ratio under that severe scenario. Bank of New York Mellon Corp,
JPMorgan Chase, Morgan Stanley, Northern Trust and State Street
all reported double-digit capital ratios after the test, as did
the US operations of Deutsche Bank and UBS.
    By comparison, some smaller regional lenders saw their
capital levels skirt closer to the minimums, with BMO, Citizens
Financial Group, and HSBC all reporting stressed capital ratios
below 7%.
        The largest global banks all posted capital ratios well
above minimums, with JPMorgan posting the highest at 12.5%, and
Wells Fargo the lowest at 8.1%. Bank of America posted a 9.1%
capital ratio, and Citigroup posted a 9.7% ratio.
  
        The banking industry hailed the latest results as proof
that banks are solid, and criticized 
    efforts
     by the Fed and other regulators to boost big bank capital
requirements.
  
        "The continued strength and resilience of the banking
sector is further evidence that the recent tsunami of new
regulation, including proposed higher capital standards, is
unwarranted," said Rob Nichols, CEO of the American Bankers
Association, in a statement.
  
        
  
        STEEPER LOSSES
  
        The Fed singled out credit cards as a particular source
of losses for banks, accounting for over a quarter of
hypothetical losses. The Fed noted that large bank credit card
balances have grown by over $100 billion in the last year, and
delinquency rates have risen by over 40%.
  
        The tested banks overall saw losses of 17.6% to existing
loan balances on credit cards, but Ally Financial experienced
losses of 40.6% in the test on its relatively small credit card
portfolio. Capital One, one of the nation's largest credit card
banks, experienced losses of 23.2%, and Goldman Sachs recorded
25.4% in losses.
  
        The Fed also said that banks' corporate credit
portfolios have shifted towards riskier loans, and they now hold
a larger share of non-investment grade corporate credit, with
these loans more than three times more likely to default than
investment grade ones.
  
        In the 2024 stress test, banks were projected to lose
$142 billion on commercial and industrial (C&I) loans,
representing 21% of total projected losses. C&I loans are made
to businesses and can include working capital advances, term
loans and loans to individuals for business purposes. 
  
        Discover Financial, which Capital One hopes 
    to buy
     pending regulatory approval, posted the steepest commercial
and industrial loan losses at 21.8%.
  
        The Fed also flagged that non-interest income at banks
from items like investment fees have declined significantly in
recent years, while non-interest expenses like compensation and
real estate costs have not.
  
    While banks were expected to perform well under this year's
exam as they have in years prior, the annual results are
significant for each firm because how well they perform dictates
how much capital they must hold against potential losses. Excess
funds beyond those capital levels can then be returned to
shareholders.

 (Reporting by Pete Schroeder, editing by Deepa Babington)
 ((Pete.Schroeder@thomsonreuters.com; 202-310-5485;))