Bank Stress Tests 2023; Lower Stress Capital Buffers Likely Coming for Many of Our Banks

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan JPM, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

Capital One on the other hand appears to be set to see the largest increase in its SCB, which is potentially set to increase from 3.1% to 4.8%. While this is the biggest increase among our coverage, it does help that the bank already has a CET1 ratio of 12.5%, so the bank already easily covers their potential new regulatory minimum of roughly 9.2%-9.3%, and we wouldn’t expect the bank would have to change its current internal capital targets. In summary, we would view today’s results in a positive light, and we do not expect any of the banks under our coverage will have to increase their current internal CET1 target ratios.