Capital One was among the large bank holding companies that on Monday disclosed the results of their mid-year stress tests, based on the latest "severely adverse" scenario provided by the Federal Reserve.
This is the third round of stress tests this year for Capital One at the holding company level, following the Dodd-Frank Act Stress Tests (DFAST) in early March that gauged the ability of the largest 18 U.S. bank holding companies to maintain Basel 1 Tier 1 common equity ratios of at least 5.0% through 2014 under the scenario of a terrible economic recession. The Comprehensive Capital Analysis and Review (CCAR) later in March applied the big banks' capital deployment plans to the same dire scenario.
Capital One said that under the new "severely adverse" scenario that includes a 4% decline in GDP over six quarters, with the unemployment rate increasing to 11.7% over eight quarters, along with a 21% drop in home prices and a 60% decline in stock prices of nearly 60%, it would post cumulative net losses of $2.3 billion for nine quarters through the second quarter of 2015, with a minimum Tier 1 common equity ratio of 9.9%. That was a solid improvement from the minimum Tier 1 common equity ratio of 9.2%resulting from the CCAR test. The latest stress tests were based on March 31 financial statements."Today's data release reinforces our view that COF has the ability to ask for a higher level of capital return in the next CCAR process given the fact that the company remains comfortably capitalized even in a stress scenario," KBW analyst Sanjay Sakhrani wrote late Monday in a note to clients. The analyst reiterated his "outperform" rating for Capital One, with a price target of $79.00. Please see JPMorgan, Other Big Banks Juiced by Mid-Year Stress Tests for much more detail on the solid mid-year stress tests, along with results for the "big six" U.S. banks. These include Bank of America (BAC), Citigroup (C), Wells Fargo (WFC - Get Report), Goldman Sachs (GS) and Morgan Stanley (MS - Get Report), in addition to JPMorgan (JPM - Get Report). Morgan Stanley showed the greatest improvement in its minimum Tier 1 common equity ratio under the mid-year stress tests from the CCAR tests, with the ratio rising to 9.5% from 6.7%.