Bank stocks rose Tuesday a day ahead of the publication of the Federal Reserve’s annual stress test results for U.S. banks after a difficult first half for the sector as it absorbed the impact of three regional bank failures this year.
After regulators have studied bank balance sheets and made any potential tweaks to capital adequacy to protect the U.S. financial system, dividend and stock buyback plans may become clearer.
“We expect the Fed will praise the overall strength of the banking system while warning of potential hazards ahead,” said Ian Katz of Capital Alpha Partners.
Fed Vice Chair for Supervision Michael Barr is also expected to signal tougher tests to come in 2024 by potentially lowering the threshold for annual stress testing to banks with at least $100 billion in assets, he said.
“The Fed looked a bit behind the times by not having more rigorous testing for a rising interest rate environment, and it will try to fix that,” Katz said. “It will also address concerns about bank liquidity.”
The KBW Nasdaq Bank Index BKX, -0.57% was up 1.% Tuesday, the SPDR S&P Bank exchange-traded fund KBE, -0.39% was ahead by 2.2%, the Financial Select SPDR ETF XLF, -0.40% was up by 0.8%, and the SPDR S&P Regional Banking ETF KRE, -0.43% was up by 2.5%.
This year’s stress tests are taking place against a backdrop of regional banking instability following the collapse of Silicon Valley Bank, Signature Bank and First Reserve Bank earlier this year.
The sector also faces potential significant regulatory changes in capital, liquidity, and debt funding, said analyst Vivek Juneja of J.P. Morgan Chase.
Some banks may have to increase their stress capital buffers while stock buybacks and dividends may be under pressure.
“Capital return is due to slow due to a trifecta of factors: 1) slowdown in earnings with likely decline in 2024; 2) increasing regulatory requirements, which would pressure earnings and capital; and 3) potential for recession, which would further hurt earnings,” Juneja said in a research note.
He said he expects bank stocks to remain choppy in the near term. Investment banking activity is showing some “green shoots” but trading revenue has fallen amid volatility, he said.
J.P. Morgan’s Juneja cut his Bank of America’s BAC, -0.67% target price to $31 from $32.50, while Citigroup Inc.’s C, -0.54% price target was cut to $50.50 from $53, and Wells Fargo & Co.’s WFC, -0.75% target price was reduced by $1 to $42.
U.S. Bancorp’s USB, -0.95% target price was cut to $35 from $36.50, Truist Financial TFC, -0.17% saw its price target reduced to $32.50 from $34 and PNC Financial PNC, -0.40% was reduced to $132 from $138.
Citizens Financial Group’s CFG, -2.03% price target was cut by $2.50 to $29 and Fifth Third Bancorp’s FITB, +0.13% price target was reduced to $27 from $28.50 and Regions Financial’s RF, -0.46% price target was lowered to $19.50 from $20.
Also Read: Fed official eyes ‘reverse stress tests’ for banks as results awaited after 2023 bank failures
Greg Robb contributed to this report.
