NEW YORK (TheStreet) -- The Federal Reserve late on Thursday announced the results of its annual stress tests for the 18 largest U.S. banks, with Bank of America (BAC) and four larger regional banks emerging as "winners," according to FBR analyst Paul Miller.
For bank stocks investors, the Fed's announcement on Thursday only told part of the story. The regulator on March 14 will announce the results of another set of tests, applying the large banks' 2013 capital plans to the "severely adverse scenario" of a severe recession beginning this year. That's when the Fed will announce whether or not it approves stress-tested banks' plans to return additional capital to investors through dividend increases and/or stock buybacks.
The Fed's stressed scenario includes a 4% increase in the unemployment rate during 2013, along with 5% negative GDP growth, a 50% decline in equity prices and a 20% decline in real estate prices. All of the banks tested in the first round would remain well-capitalized under the "severely adverse scenario," with Tier 1 common equity ratios remaining at or above 5.0% through 2014, except for Ally Financial, which would see its Tier 1 common ratio drop as low as 1.5%, according to the regulator.
The stress tests were based on third-quarter financial statements. Despite relatively meager earnings, Bank of America managed to boost its Tier 1 common equity ratio to 11.41% as of Sept. 30, from 8.85% a year earlier. The Federal Reserve said that under the "severely adverse scenario," Bank of America's minimum Tier 1 common ratio would be 6.8%, putting the company ahead of JPMorgan Chase (JPM), at 6.3%. Among the "big four" U.S. banks, the Fed said that Citigroup (C) would be the strongest under highly stressed economic conditions, with a minimum Tier 1 common equity ratio of 8.3%, while Wells Fargo (WFC) would bring up the rear, with a minimum Tier 1 common ratio of 7.0%.The Federal Reserve's stress test results showed that Bank of America would lose $51.8 billion through the end of 2014, under the "severely adverse scenario." Bank of America said in a presentation on Thursday that its internal stress tests -- based on the Fed's scenario -- showed that the company's losses would total $43.8 billion, before taxes, with a minimum Tier 1 common equity ratio of 7.7%.
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