Bank Stress Tests Stress Morgan Stanley, Bank of America Shares

Nearly everyone passed the bank stress tests, but if this is passing, I would hate to see what happens to banks like JPMorgan Chase (JPM), Citigroup (C), Morgan Stanley (MS), Goldman Sachs (GS) and Bank of America (BAC) if they’d failed.

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One possible reason for the lukewarm reaction to the stress tests: The variation of the Fed’s results with Street estimates and the bank’s best guesses. Credit Suisse analyst Moshe Orenbuch and team note that Bank of America’s estimated a Tier 1 common ration of 8.6%, 2.6 points higher than the Fed’s 6%, which is only one point higher than the minimum passing grade. Citigroup, meanwhile, had estimated a 10% tier 1 common ratio, three points higher than the Fed’s 7%, but still had two points to spare. JPMorgan Chase, meanwhile, had estimated 6.5%; the Fed said it was 6.3%. Morgan Stanley, meanwhile, missed Credit Suisse’s forecast by four percentage points, while Goldman Sachs was 1.7 points lower.

Orenbuch says those results aren’t surprising. He explains why:

Not surprisingly, the capital markets sensitive banks appear on the lower end of the range given losses associated with a large counterparty default, in addition to higher trading losses vs. regional bank peers.

Jefferies’ Ken Usdin and team believe the results show the stress tests have “teeth.” They explain:

[Stressed] capital ratios were slightly lower than we would have expected. Most banks that have disclosed the results of their own internal stress tests using the same Fed inputs showed capital ratios that were above the Fed’s outputs. Our initial take is that discrepancies were largely driven by higher charge-off and balance sheet growth assumptions used by the Fed.

Usdin also expects Citigroup to be allowed to raise its dividend from its current level of one penny, which “could entice some income-oriented investors.”

Shares of Citigroup have dipped 0.2% to $50.13 at 2:15 p.m., while Bank of America has dropped 1.6% to $17.64, JPMorgan Chase has gained 0.3% to $60.30, Goldman Sachs has fallen 0.7% to $167.97 and Morgan Stanley has declined 1% to $32.47.