NEW YORK ( TheStreet) -- The nation's largest banks have sailed through yet another set of stress tests mandated by regulators, showing "the industry is well positioned to increase capital distributions" next year, according to Sterne Agee analyst Todd Hagerman.
Hagerman in a note to clients late on Monday wrote that "the bank-conducted stress-testing results, which extend through 2Q15, demonstrated continued improvement in the trajectory of core profitability, improved expected cumulative loss rates, and higher levels of core capital."
Investors may be confused to be reading about stress tests during the summer, since the largest banks have been undergoing the Federal Reserve's stress tests for the past few years in March, after which the group has announced capital deployment plans for the following year. The good news is that the big banks have come out of this round of tests looking considerably stronger than they did before.
Back in March, the Fed first conducted its annual Dodd-Frank Act Stress Tests (DFAST), to gauge the 18 largest US. Bank holding companies' ability to maintain minimum Basel 1 Tier 1 common equity ratios of 5% through a "severely adverse" economic scenario that included a 4% increase in the unemployment rate, which would have been "above any level experienced over the last 70 years." The severely adverse scenario also included an increase of corporate bond spreads to Treasury bonds of 550 basis points, real GDP declining by 5%, a 50% drop in stock prices and a 20% decline in home prices through the end of 2014.The stress tests in March were based on September 2012 financial data, and showed that all 18 holding companies would survive though the end of 2014 with minimum Tier 1 leverage ratios of at least 5%, except for Ally Financial, the former GMAC. One week after the DFAST results were announced, the Fed incorporated banks' capital return plans into another set of stress tests using the same scenario -- the Comprehensive Capital Analysis and Review (CCAR). All the banks passed CCAR, except for Ally Financial and BB&T (BBT) of Winston-Salem, N.C., which had its capital plan rejected on "qualitative" grounds. JPMorgan Chase (JPM - Get Report) and Goldman Sachs (GS) received "conditional" approval for their capital plans, but were required to submit revised plans to the Federal Reserve.
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