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WITH A LESS STRESSFUL TEST, THE FOCUS IS ON BASEL III

With the results of the U.S. Federal Reserve's annual stress test for the financial industry due to be released on Wednesday evening, Keefe, Bruyette & Woods analyst Christopher McGratty outlined what investors in the 24 financial services companies being tested should expect.

Unlike in past years, McGratty noted that "the results will not impact participants' existing capital requirements." This is because the Fed disclosed in February that the Board voted to maintain the current stress capital buffers until 2027 as it continues to work on revamping the process.

Typically the stress test results can be market moving, especially as many of the institutions being tested tend to announce capital return plans such as dividends or buybacks a few days after the results are released.

But given this year's stress capital buffer (SCB) freeze and the wait for the finalization of proposed financial regulation changes, known as Basel III, McGratty says he doesn't expect the stress test "to drive meaningful revisions to repurchase program authorizations" this year.

Instead, management teams may wait and "capital return catalysts may be in a holding pattern" until Basel III is formalized, which KBW expects to happen in the second half of the year.

"In some respects, the test isn't all that meaningful this year, because it's going to change next year. And then we believe our broader capital optimization or messaging is going to be wrapped up into the Basel III reform," McGratty told Reuters in an interview. "It should be less of a market-moving event."

In the note, McGratty wrote that in the test "the main drivers for changes y/y revolve around portfolio remixing, and modestly better loan loss assumptions as well as potential shifts in trading/counterparty loss assumptions," for the global systemically important banks (G-SIBs).

In all, KBW writes that the bank industry "is in good shape with capital, as all the companies involved have excess capital relative to the implied pro forma target capital ratios and requirements" and they add that the industry is also "in a position to take advantage of de-regulatory momentum."

"We're in a favorable regulatory environment," McGratty said on the call, adding that while the stress test is still difficult "it is becoming a little bit less onerous."

The companies being tested this year are: Ally Financial ALLY.N, American Express AXP.N, Bank of America BAC.N, Bank of New York Mellon BNY.N, Citigroup C.N, Citizens Financial CFG.N, Capital One Financial COF.N, First Citizens BancShares FCNCA.O, Fifth Third FITB.N, Goldman Sachs GS.N, Huntington Bancshares HBAN.O, JPMorgan JPM.N, KeyCorp KEY.N, Morgan Stanley MS.N, M&T Bank MTB.N, Northern Trust NTRS.O, PNC Financial Services PNC.N, Regions Financial RF.N, Charles Schwab SCHW.N, State Street STT.N, Truist Financial TFC.N, U.S. Bancorp USB.N and Wells Fargo WFC.N.

(Sinéad Carew)

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