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Lending

Mega banks easily pass internal stress tests

Lenders pass capitalization tests under worst case scenarios

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Banking institutions conducted Dodd-Frank mandated mid-cycle stress tests, with all of the institutions easily surpassing the minimum capital requirements under the most taxing of circumstances.

The updated figures are part of a requirement for large holding companies to help gauge their financial strength under a severely adverse scenario and to make sure they meet the 5% regulatory minimum under the capital requirements test. More than a dozen banks released their results back in March.

 

The scenario the banks assess their strength against assumes interest rates will drop and stay low, while home prices plummet and international trade remains in a state of disruption.

Bank of America (BAC) said its minimum threshold for the measure of financial well-being, known as the Tier-1 common ratio, would reach 8.4% under the latest test, up from 7.7% in March, according to the results.

Additionally, the banking giant projected a pre-tax loss of $26.1 billion under a severely adverse scenario, a significant improvement from its March projection of a $43.8 billion loss.

On a similar note, Citigroup (C) noted that it could stay above the minimum regulatory capital requirements in a severe financial scenario.

The bank’s Tier 1 common capital ratio would fall as low as 9.1% in such a scenario, well above the 5% minimum requirement set by the government, according to a presentation by the company.

Additionally, the mega bank estimated its loan losses would reach $43.1 billion during the period, driven by $6.5 billion in first-lien mortgage losses and $19.9 billion in credit card losses.

Goldman Sachs (GS) also released new data, saying it would have higher capital levels under a severely adverse scenario than it projected earlier this year.

The bank stated its minimum threshold would fall to 8.9%, up from its projection of 8.6% in March, according to the results.

Additionally, Goldman would log a $6.2 billion loss on $15.5 billion in pre-provision net revenue. This compares with a $6.6 billion loss in revenue of $20.4 billion in March.

Similarly, PNC Financial (PNC) said its minimum threshold for the measure of its Tier 1 common ratio would fall to 9.4%, up from 7.9% in March, according to the company.

Additionally, the bank projected a $0.3 billion loss on $10.3 billion in pre-provision net revenue.

Wells Fargo (WFC) reported a Tier 1 common capital ratio of 10.3% in the event of severely adverse economic conditions, up from 8.3% in March.

For the nine-quarter timeframe, the company estimated a cumulative pro forma net loss before taxes of $3 billion on $52.6 billion in pre-provision net revenue.

Additionally, the mega bank estimated its loan losses would reach $29.7 billion during the period, driven by $5.8 billion in first-lien mortgage losses and $6.8 billion in junior lien and home equity lines of credit losses.

Morningstar analyst James Sinegal said he wasn't surprised to see that the big banks made it through another round.

"They've all gone through the stress testing process a few times now, and balance sheets are still improving every quarter," Sinegal stated.

He added, "The big question in my mind at this point will be how much capital they have to hold before the can more aggressively return capital in the form of dividends and buybacks."

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