Goldman Sachs led the Dow Jones Industrial Average higher on Monday morning after it cleared the Federal Reserve's stress test with flying colors. Analysts also placed Wells Fargo and M&T Bank among the biggest winners of the Fed's annual test, which determines how well a bank's capital buffers can survive a crisis.
The Fed's clearance for the banks to lower their capital reserves should free up space for additional lending, dividends, stock buybacks and possibly acquisitions. Look for dividend and buyback announcements to hit next week.
Low-Stress Fed Test
Citi analyst Keith Horowitz wrote in a Monday note detailed by The Fly investment news site that participating banks should see an average 70-basis-point decline in their capital buffer ratio. Goldman Sachs led the way with an improvement of about 300 basis points, he said. Wells Fargo and M&T Bank followed with 130 and 110 basis points.
Deutsche Bank analyst Matt O'Connor wrote that Bank of America and JPMorgan Chase "also had nice drops" to the minimum 2.5% level.
O'Connor wrote that this is just the first step in lowering capital requirements. Next year's Fed test should bring further improvement. In addition, the Treasury Department plans to lower the supplementary leverage ratio, which requires a fixed percentage of capital as a buffer against risk, even for low-risk Treasury holdings.
The Fed's stress test featured a 33% crash in home prices and 10% unemployment. Yet banks were positioned to experience a manageable 1.8% aggregate decline in their capital cushion. "Large banks remain well capitalized and resilient to a range of severe outcomes," Michelle Bowman, Fed vice chair for supervision, said in a statement.
Banks performed better than a year ago, when capital declined 2.3% in the stress test. The Fed indicated this year's scenario had a better design and improved measurement.
GS, WFC, JPM Stock Performance
Goldman Sachs rose 2.1% to 705.05 in Monday stock market action. GS stock is extended and bumping off new highs after an early-June breakout. Shares ended Friday up 11% from the 62.79 handle buy point. Through Friday, the stock has a year-to-date gain of almost 21%.
Wells Fargo climbed 1.1% to 80.42. After clearing a 75.38 buy point from a double-bottom base , WFC stock trades just above a buy zone that runs to 79.14.
JPMorgan, up 1.3% to 290.98, is also extended after clearing a 245.67 buy point in a double-bottom base in early May. JPM stock has climbed around 17% from that entry, with a 20% gain for the year. JPMorgan is part of the IBD Leaderboard portfolio of elite stocks.
M&T Bank stock ticked up 0.3%, and Bank of America added 0.6%.
