Self-Administered Stress Tests Look Very GoodStarting this year, the holding companies are required to make public disclosures of the results of their own stress tests by Sep. 30, using a new scenario provided by the Federal Reserve, based on March 31 balance sheet and off-balance sheet exposures. The new "severely adverse" scenario provided by the Federal Reserve includes a 4% decline in GDP over six quarters, with the unemployment rate increasing to 11.7% over eight quarters. The new scenario also includes a 21% drop in home prices and a decline in stock prices of nearly 60%. The scenario also includes plenty of international economic turmoil. Under the new scenario, the banks would make their scheduled dividend payments, while ceasing common-share repurchases and only issuing new shares under existing employee compensation plans. Yes, executive gravy would continue to be ladled out. JPMorgan Chase ( JPM) on Monday said that under its mid-year stress tests, the company would end up with a small pretax net loss of roughly $300 million for nine quarters through June 2015, with a minimum Tier 1 common equity ratio of 8.5%. The minimum Tier 1 common equity ratio under the latest stress test was up considerably from 7.6% in March. Bank of America ( BAC) on Monday disclosed that its mid-year stress test results indicate the company would post pretax losses of $26.1 billion over nine quarters thorough June 2015 under the harsh new scenario, and that its minimum "hypothetical stressed" Tier 1 common equity ratio though the cycle would be 8.4%, which is up from the minimum ratio of 7.7% from the second round of Federal Reserve stress tests (CCAR) in March. That's a very comforting increase for the nation's second-largest bank by total assets, which has been making a determined effort led by CEO Brian Moynihan to trim expenses and work through the huge portfolio of nonperforming mortgage loans and investors' loan repurchase demands, springing mainly from the acquisition of Countrywide Financial in 2008. The bank had previously estimated its losses under the Fed's previous severely adverse scenario would total $44 billion.
- JPMorgan Chase is the cheapest among the big six on a forward P/E basis, with shares closing at $53.14 Monday and trading for 8.7 times the consensus 2014 earnings estimate of $6.09 a share, according to analysts polled by Thomson Reuters. Since the company had already announced that its third-quarter legal expenses would be roughly $1.5 billion, sell-side analysts EPS estimates seem unlikely to be affected by the expected regulatory settlements this week.
- Citigroup's shares closed at $51.00 Monday and traded for 9.2 times the consensus 2014 EPS estimate of $5.55
- Bank of America closed at $14.53 and traded for 10.7 times the consensus 2014 EPS estimate of $1.36
- Wells Fargo closed at $42.89 and traded for 10.7 times the consensus 2014 EPS estimate of $4.01
- Goldman closed at $167.02 and traded for 10.8 times the consensus 2014 EPS estimate of $15.52
- Morgan Stanley is the most expensive of the big six, at least for the time being, with shares closing at $28.73 Monday and trading for 11.1 times the consensus 2014 EPS estimate of $2.60