In 2012, these two trust banks had common capital ratios, before distribution plans, of 13.3% and 15.1%, respectively. Note that the worst case economic conditions of the 2012 test were not as severe as the 2013 standard. American Express Company (NYSE:AXP) is the only other large bank holding company to achieve double digit capitalization in the 2013 test at 11.1%.
American Express’s common ratio held up remarkably well in the hypothetical stress test, owing to its high quality underwriting in connection with its credit card business. Its lowest common ratio during the hypothetical economic crisis was just 160 basis points below its stated common ratio as of Sep. 30, 2012.
A few more losers
The biggest losers, other than Ally, were the investment brokerage banks. Due to the conditions of the hypothetical economic meltdown, Morgan Stanley‘s common ratio would fall from a stated 13.9% at the end of the 2013 third quarter to as low as 5.7%. Goldman Sachs Group, Inc. (NYSE:GS) common ratio would fall from 13.1% to 5.8%. Compare those sorts of capital losses with a conservative bank like Fifth Third Bancorp (NASDAQ:FITB), whose common ratio would fall from a stated 9.7% to only as low as 8.6% under the adverse scenario.
Another large commercial bank without much of an investment bank presence, U.S. Bancorp (NYSE:USB) also fared well. Its common ratio only declined by 70 basis points, from a modest 9% as of Sep. 30, 2012 to no lower than 8.3% in the hypothetical scenario. Even commercial banks with large investment banking arms fared not too well in the 2013 stress test. JPMorgan Chase & Co. (NYSE:JPM), for instance, fell from a common ratio of 10.4% as of Sep. 30, 2012 to 6.8% under the adverse scenario. In this sort of stress test, it was the most conservatively run of banks that fared the best.
The takeaway
In coming days, the main result of this stress test will be the Federal Reserve’s decisions on allowing dividend and share buybacks by the individual banks. It is obvious that JPMorgan will not be making any more ten billion dollar buybacks until it builds up more capital.
On the other hand, banks like the aforementioned Fifth Third, U.S. Bank, Citigroup, SunTrust Banks, Inc. (NYSE:STI), along with PNC Financial Services (NYSE:PNC), and Regions Financial Corporation (NYSE:RF), are all positioned for moderate or substantial increases in their dividends or share buyback programs. I will be reporting on all these banks in turn as more information is released.
The article Banking Stress Test Results Not What They Seem originally appeared on Fool.com and is written by Maxwell Fisher.
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