Regional Banks 'Ace' Stress Tests: Miller

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%.

Miller said in a report on Friday that in addition to JPMorgan, the companies that "disappointed" in the Fed's stress test results included Goldman Sachs ( GS), and Morgan Stanley ( MS). Lower minimum Tier 1 common ratios for the big brokers imply "a decreased likelihood for higher capital deployment scenarios in the form of both buybacks and dividends relative to 2012," Miller wrote.

Regional "Winners"


Miller wrote that the following four banks were "best positioned as winners," from the stress tests:
  • Fifth Third Bancorp (FITB) of Cincinnati. The bank would lose roughly $300 million under the Federal Reserve's "severely adverse scenario," operating through 2014 with a minimum Tier 1 common equity ratio of 8.6%.
  • KeyCorp (KEY) of Cleveland. The bank's losses through 2014 would total $2.4 billion, with a minimum Tier 1 common equity ratio of 8.0%.
  • SunTrust (STI) of Atlanta. The bank would lose $4.1 billion through 2014, with a minimum Tier 1 common ratio of 7.3%.
  • PNC Financial Services Group (PNC). PNC would lose $1.4 million through 2014 under the Fed's scenario of a severe recession, with a minimum Tier 1 common equity ratio of 8.7%.

"Companies with robust stressed capital levels trading at or below tangible book stand to benefit the most from increased share buybacks and higher dividends," Miller wrote. "The most likely beneficiaries, in our view, are Bank of America and KeyCorp."

Bank of America's shares closed at $12.26 on Thursday. The shares traded for 0.9 times their reported Dec. 31 tangible book value of $13.36.

KeyCorp closed at $9.96 Thursday. The stock traded just above tangible book value, according to Thomson Reuters Bank Insight.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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