Predicting Bank Stress Test Results

Posted by: Ben Steverman on April 24, 2009

The U.S. Treasury today releases the methodology for its “stress test” of major U.S. banks, but the full results may not be known until May 4.

The results matter to investors even if a bank technically passes the federal government’s test. A weaker assessment could force banks to raise additional capital, which would dilute existing shareholders.

Investors and analysts are already betting on the results of the stress tests. An Apr. 23 report from Keefe, Bruyette & Woods (KBW) is particularly interesting in this regard.

KBW’s bank research team conducted its own stress test, making educated guesses at what Treasury would require. It tried to assess the credit fallout for banks of a 2010 unemployment rate of 10.3% and more serious credit deterioration for mortgages, credit cards and loans in home equity, commercial and commercial real estate.

One conclusion from KBW: Based on an analysis of the entire U.S. banking system, the industry eventually could need an additional $1 trillion of capital to meet certain credit benchmarks and meet regulatory definitions of “well capitalized.”

KBW individually examined 17 of the banks undergoing the first round of stress tests. It expects none will fail the tests.

But, Bank of America (BAC) “has a higher risk than its peers to be forced by the U.S. government to receive yet another round of government capital.” After a stress test of BofA’s loan portfolio, KBW estimates it could see another $78 billion in losses, 8.9% of its loan balance from the first quarter of 2008.

JPMorgan Chase (JPM) may need another $10 billion in capital, but will be able to raise that money in private markets without government help, KBW concludes.

The report says a “significant capital raise is needed to strengthen the balance sheet at Wells Fargo.” (WFC)

There is good news in KBW’s conclusions. U.S. Bancorp (USB) is “unlikely to require additional capital.”

Several banks may try to quickly pay back federal bailout funds provided through the Troubled Asset Relief Program, or TARP, including BB&T (BBT), Goldman Sachs (GS) and Morgan Stanley (MS).

Many of these assessments are already well reflected in bank share prices. For example, U.S. Bancorp’s stock is down 46% in the past 12 months, but BofA shares have dropped 76%.

Of course, the U.S. Treasury, relying on a larger staff and different methods, could reach very different conclusions from KBW or other experts. For bank investors, a big worry (and opportunity) is the unexpected. Stress test results could scramble our assumptions about which banks are truly weak or strong.

Reader Comments

Hugo van Randwyck

April 24, 2009 2:00 PM

Demerge all these banks, into 100 to 150 businesses each. The parts are likely worth more than the whole. Save a lot of time and money. Give each healthy bank, i.e. non-TARP, their tax back from last year, and a tax holiday for the next 2 years. Reward good management, hiring, training and promotion of employees. This is easy. If more money looks like it is going to be wasted on TARP banks, Governors in each State could write/email people letting them know about 'online switch kits'; that healthy banks have, for moving accounts easily. Free enterprise works better when you reward success.

Jill

April 24, 2009 4:27 PM

There are no non-TARP banks. All banks were forced to take TARP so that they would be equal to their competition. None of our major banks are non-TARP banks. Also, they were told they could not pay back the money yet either. So we can't look at a bank that received TARP and say "they were doing badly" we have to look at their books individually. According to this, JP Morgan Chase and US Bancorp don't need more TARP, they can do it on their own...the problem is...will the government allow that to happen??

john

April 24, 2009 6:40 PM

This is a fraud by the government.Th government is giving confidential information to the banks to let them gain with trading.This is not a democracy anymore.We should have blocked the banks bail out

john

April 24, 2009 6:40 PM

This is a fraud by the government.Th government is giving confidential information to the banks to let them gain with trading.This is not a democracy anymore.We should have blocked the banks bail out

john

April 24, 2009 6:42 PM

This is a fraud by the government.Th government is giving confidential information to the banks to let them gain with trading.This is not a democracy anymore.We should have blocked the banks bail out

jim

April 24, 2009 8:29 PM

They want to return tarp money do they? Well how about jpm, c, gs return the 100's of billions of fdic backed paper? JPM has trillions in deriavatives how do you insure against that? This is a trophy for every player so they can suck in more investors. They are well capitalized Mr Geitner? Then why did you take trillions from the taxpayers to bolster this crap up?

jim

April 24, 2009 8:29 PM

They want to return tarp money do they? Well how about jpm, c, gs return the 100's of billions of fdic backed paper? JPM has trillions in deriavatives how do you insure against that? This is a trophy for every player so they can suck in more investors. They are well capitalized Mr Geitner? Then why did you take trillions from the taxpayers to bolster this crap up?

John Ogden

April 25, 2009 12:05 PM

It continues to amaze me. The Feds themselves cause the problems for banks. If you tell a bank they need more capital they can only raise the capital by one of two ways - sell stock or call in loans. No one can sell stock so the banks are calling in loans, even ones that are paying and are not behind. That causes fire sales which reduces the value of assets and thereby increases bank stress. Anybody see a merry-go-round here? We need to allow a bank to call a loan due if the borrowers are paying and are willing to continue to pay the P&I.

Joe

April 25, 2009 2:47 PM

I saw this posted on http://www.GreaterDepression.Com and feel that the government should not be giving any banks TARP money at all. Times are tough? Gee, too bad. Close down. Got assets? Sell them -- just like any other business in America.

Mike

April 27, 2009 1:46 PM

Does anyone know how the banks suddenly posted "earnings" in Q1? I am going to track the earnings for these banks over the next quarter. This is a great site to do that,

http://www.fortune500earnings.com

I have a feeling we will see losses in Q2 and at least Q3 and for next year. The only toss up would be if the mark-to-market helps the banks migitate losses over a longer period.

JOSE LUIS REVILLA ESCUDERO

May 13, 2009 9:23 AM

Print more MONEY !!!


39 banks rescued by the government in the US.
A manipulated "stress test" to avoid big impacts in the stock exchange.

Interest rates at 0%.
Larry Summers, ex-Wall Streeter, commanding the situation.

Dollar at its lowest against major currencies.
China, Rusia, and the Middle East countries claiming for a new world reference currency.

Obama trying to fear big US corporations not to evade taxes in key offshore financial centres.

China thinking about the possibility of converting all its T-bonds into other currencies investments, to avoid its dramatic exposure to US dollars. Driving therefore, in this likely scenario, to a huge drop in the US dollar quotation.

Tim Geithner protecting Citi and Bank of America from bankruptcy.

Has anyone thought about the huge US Public Deficit ?... My friends, taxes will for sure rise for the high incomers.So, where is JOE THE PLUMBER ?

Are we really that good ?
Does Mr Obama´s optimism draw the real situation ?
Are we playing media games again ?


According to the international markets evolution during the last two weeks, it seems the worst has passed by. Indexes around the globe have picked up the lost ground during the last 6 months.
The first quarter results I referred to in my previous article " BEARISH SEASON is over", seem to have kept this suspicious optimism.

But, my vision about it, as a private wealth manager, is resumed in one single question:
What´s next, folks ??

The financial recovery will seed the real economy future evolution ??... Or the real economy will continue suffering much longer ???

Since I have to give an answer to my customers almost everyday, I decided to begin buying partial stocks in key "rescued" banking institutions, reinforcing this strategy with defensive companies, such as pharma companies with some due "blockbusters" to be released, and some high yield utilities corporations.

Obviously, equity not accounting for more than a 15% of the total investments.


My worries now stand at the point if politicians, economists, experts, advisors, ... are not really doing the same that supposely created the current turmoil... that for some people, it is the worst financial crisis in history. That is:

1) Money at 0%. That means, pure savings are no longer an option again.

2) Improve consumer rates. That means, to come back again to the exhacerbated consumer feeling, helped by money at 0%.

3) Rescued banks. No penalty for their wrong doing.

4) To ease monthly payments to those with forclosures risk.

5) To provide a social insurance policy, to avoid huge monthly medical payments... So, the money till now invested in these insurances, will go directly into the consumption of other goods. This, together with the "cheap money", more inflation.

6) A huge Public Deficit.

Don´t you think that maybe we are saving the kids from dying into the river, by creating the conditions of a future tsunami ?


Jose Luis Revilla Escudero
President
WWShares, Inc
"When Wealthy means also Healthy"
www.worldwideshares.blogspot.com

Post a comment

 

About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

BW Mall - Sponsored Links

Buy a link now!