“Managements probably need to be a little bit more optimistic, the Fed's a regulator,” Stifel Financial Corp. CEO Ronald Kruszewski told Matt Miller in an interview on Bloomberg Television's “Fast Forward” program. “That's not unusual.”
The Fed's minimum projected ratio for Bank of America Corp., which didn't request buybacks or a dividend increase last year, would drop to 6.8 percent in the most adverse scenario while Wells Fargo & Co.'s would be 7 percent.
Losses for the 18 firms, which represent more than 70 percent of the assets in the U.S. banking system, would total $462 billion over nine quarters, according to the Fed.
Under the Fed's worst-case scenario -- where U.S. gross domestic product doesn't grow or contracts for six straight quarters, unemployment peaks at 12.1 percent and real disposable income falls for five consecutive periods -- the 18 companies would lose $316.6 billion on soured loans, led by Bank of America. The Charlotte, North Carolina-based firm would lose $57.5 billion, followed by $54.6 billion for Citigroup and $54 billion each for Wells Fargo and JPMorgan.
Eoin Treacy's view While contemplating the implications of a worst case scenario is necessary when calculating capital adequacy requirements, as investors we are more focused on the likelihood of such an event. At present, despite short-term overbought conditions for some risk assets, that seems an outside possibility. Additionally as the financial condition of the banking sector continues to improve, there is cause to be optimistic on potential for dividend growth over the medium term.
The S&P 500 Banks Index has held a progression of higher reaction lows since August 2011 and has rallied over the last few months to test the September peak and the upper side of the more than 4-year base. A clear downward dynamic would be required to question current scope for a successful upward break. The S&P500 Diversified Financials is also testing the upper side of its base.
The performance of the regional banking sector is often considered a truer representation of the health of the domestic economy. Therefore the fact that the KBW Regional Banks Index hit a new four year high today bolsters the view that the US recovery, while not as quick as many hoped, is well established.
Here is a list of regional banks that have hit at least new 3-month highs in the last five days.