Stress Test Results In A 'Shot In The Arm' For Bank Stocks Says Analyst

Big U.S. banks got a vote of confidence from the Federal Reserve on Thursday when all 23 banks subject to the Fed’s annual stress test passed with flying colors.

What Happened? The Fed said all the banks it tested would maintain capital levels “well above” the minimum requirements, even in the event of a “severe global recession.” That severe scenario includes 10.8% unemployment and a 55% drop in stock prices.

Related Link: 2 Reasons To Stay Overweight On The Financial Sector

Why It’s Important: On Friday, Bank of America analyst Ebrahim Poonawala said the stress test results should serve as a “shot in the arm” for bank stocks.

Poonawala said he expects the impressive test results to set the table for aggressive capital return announcements from big banks starting on June 28 after the market close.

He estimates banks had an average excess capital equal to about 15% of their market caps.

Santander Consumer USA Holdings Inc (NYSE: SC) was the best-capitalized bank based on Bank of America’s estimates of 40% excess capital. PNC Financial Services Group Inc (NYSE: PNC) was a distant second at 23% of its market cap.

Poonawala also highlighted Citigroup Inc (NYSE: C) and Wells Fargo & Co (NYSE: WFC) as the two banks that have improved their capital buffers sequentially based on June 2020, December 2020 and June 2021 test results.

“Stress test results and the upcoming capital return announcements, while not thesis changing, are supportive of the bull thesis for the group,” he said.

Benzinga’s Take: Poonawala’s bullish outlook for banks lines up with expectations that Bank of America analyst Erika Najarian discussed in May.

Najarian said the U.S. is currently experiencing “Goldilocks” inflation levels of above 2% but not too high to spook the Fed, a scenario that has historically been extremely good for bank stocks.