US bank stocks rise as lenders shrug off turmoil to ace Fed health checks

By Manya Saini and Chibuike Oguh

(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 the strong performance would lead to bigger dividends and share buybacks, citing looming new regulations and economic fears.

“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 analysts warned the checks, which “stress tested” 23 of the largest lenders, painted an incomplete picture of the country’s vast banking system, noting many mid-sized lenders 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.

Most big bank stocks gained. The Banks index finished up 2.6%, notching its biggest daily percentage gain since June 2, when it rose 3%.

JPMorgan Chase (NYSE:), Wells Fargo (NYSE:) and Bank of America (NYSE:) gained between 2% and 4.5%. Morgan Stanley (NYSE:) rose 1.5% and Goldman Sachs (NYSE:) added 3%, respectively. Those two banks are not in the index.

Citigroup (NYSE:) shares were flat, trailing peers as the bank is expected to bolster capital, which could reduce profits and dividends. Shares of Charles Schwab (NYSE:), top performer on the test, rose 2.4%.

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 severe downturn scenario but would still have over twice the capital required to absorb loan losses.

The test dictates how much capital banks must hold and how much cash they can give to investors. Lenders are expected to release capital plans after trading ends on Friday.

Wells Fargo analysts, led by Mike Mayo, said test results were in line with an estimated 5% growth in dividends by big banks this year and an uptick in buybacks.

Other analysts warned investors not to 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.

SPOTLIGHT ON SMALLER BANKS

This year’s test follows Fed interest rate hikes that resulted in some lenders suffering large unrealized losses on U.S. Treasury bond holdings. This 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, with the KBW Regional Banking Index adding 1.82%. The index has recovered 8% this month, but still remains down 23% year to date.

“Seeing how their shares performed today, I think the tests were positive for regional banks, said Sandy Villere, portfolio manager at Villere & Co, adding regional bank stocks remain a bargain, still trading below book value.

M&T Bank (NYSE:) was up 2.1% and PNC Financial (NYSE:) rose 1.7%. Citizens Financial (NYSE:) shares rebounded from early session losses, gaining 1.1%, even after J.P. Morgan analysts downgraded the stock to ‘neutral’ sayilng an increase in capital requirements could hurt profitability.