Capital One: Bank Stress Test Winner

NEW YORK ( TheStreet) -- Capital One ( COF) was the winner among stocks of large U.S banks on Tuesday, with shares rising over 2% to close at $69.13.

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), Goldman Sachs ( GS) and Morgan Stanley ( MS), in addition to JPMorgan ( JPM). 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%.

Sterne Agee analyst Todd Hagerman in a note late Monday wrote "the industry in general has made meaningful strides to catch up with the Fed's ever-increasing standards and expectations" for the 2014 regulatory stress tests in March.

Latest Regulator Leaks Concerning JPMorgan

Following numerous reports that JPMorgan was ready to pay fines of up to $700 million or $800 million to settle with the Department of Justice and federal bank regulators over misconduct related to the "London Whale" hedge trading losses last year, The Wall Street Journalon Tuesday reported that the Commodity Futures Trading Commission was also conducting a London Whale-related investigation.

According to the report -- which as usual cited unnamed sources, as the regulators seek to gain as many anti-JPM headlines as possible -- the CFTC is "focusing on a giant trading position that enforcement officials believe distorted prices and misled investors," during 2012.

The Journal also wrote that despite the reported large settlement, JPMorgan -- the company, and not individual employees, some of whom have already been indicted over the London Whale fiasco -- was still facing possible criminal charges from the Justice Department

Investors were less than thrilled, sending JPMorgan's down a nickel to close at $53.09.

The KBW Bank Index ( I:BKX) rose 0.5% to close at 64.53, with all 24 index components ending with gains, except for JPM and Wells Fargo, which was down three cents to close at $42.86.

All Eyes on the Fed

Investors Wednesday afternoon will be focused on the next statement from the Federal Open Market Committee and Federal Reserve Chairman Bernanke's press conference, following the committee's two-day policy. The issue on Wednesday is whether or not the central bank will begin to curtail its "QE3" balance-sheet expansion, which has included monthly net purchases of $85 billion in long-term securities since last September.

"No doubt the conversation among Fed officials will center around labor market conditions and whether or not the economy is strong enough to support a rollback in monthly asset purchases," according to Sterne Agee chief economist Lindsey Piegza.

In a note to clients on Tuesday, Piegza wrote "there is a clear juxtaposition between strength and weakness in the numbers creating quite the quandary for the Fed. The market is anticipating a 'taper light' announcement of $5-$10bn, suggesting the Fed is unsure of the economy's underlying momentum but also an unwillingness to continue to grow the Fed's balance sheet indefinitely."

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

>Contact by Email.

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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