It’s a controversial process that all financial institutions anxiously await every year. Since the disaster of the 2008 crisis, the U.S. Federal Reserve imposes a stress test on major banks to ensure their viability under recessionary pressures. Fortunately for all concerned, the assessed institutions passed, providing positive sentiment toward bank stocks.
According to a CNBC report, the Fed’s examination revealed that both large and regional domestic banks have enough capital resources to survive crisis situations, as defined by the test’s parameters. In this go-around, the Fed analyzed 38 banks, although it exempted three banks due to a recent minimum asset-size law.
Under this ruling, tested banks must have $100 billion in assets. The exempted institutions are CIT Group (NYSE:CIT), Comerica (NYSE:CMA) and Zions Bancorp (NASDAQ:ZION). These firms have the option of voluntarily releasing their results.
If their rivals’ performances are anything to go by, they shouldn’t worry about much. This year’s test was more severe than the prior year, with one of the scenarios being unemployment at 10%. In this hypothetical environment, the 35 banks would lose $578 billion over a nine-quarter period.
In 2017’s less-taxing stress test, the Fed estimated that the 34 examined banks would absorb $383 billion in loan losses.
Although the results are net positive, and should bolster several bank stocks, investors are also waiting for next week. That’s when the banking subjects will “reveal how much they are able to pay out in dividends and share buybacks.”
In my opinion, this year presents a tricky situation. Here are three bank stocks to consider.
Bank Stocks to Buy After the Stress Test: JPMorgan Chase
Despite the fact that the Fed imposed a more onerous stress test this year, one scenario remained the same from 2017: The unemployment rate. The central bank assumed an unemployment rate of 10%, which at the time of last year’s test was 5.25%. Yet even with that critical metric leveled one year later, the estimated losses ballooned nearly 51%.
Granted, the Fed applied more intensive pressures on the credit environment, and one more institution was examined. I get that. However, 51% is a massive jump, especially considering that financial firms should be notably stronger this year. So if I’m going to buy bank stocks following the stress test, I’m looking first to diversify. Next, I’m going to buy the best, which means JPMorgan Chase (NYSE:JPM).
By no means is JPM stock a sexy choice; I’m going to save that for my final idea. The challenge is that most bank stocks look unconvincing so far in 2018. Since analysts consider the big banks as economic bellwethers, their performance concerns me.
That’s why I think it’s smart to go with a “too big to fail” name as a portfolio anchor. Potential upside isn’t as great as other, smaller firms, but at least you won’t be left holding the bag.
Bank Stocks to Buy After the Stress Test: Wintrust Financial
Although I like stalwart bank stocks like JPM under challenging circumstances, the majors aren’t without risks. Primarily, the sector’s alpha dogs often have wide-ranging, international exposure. On one hand, this is a huge advantage in terms of multiple revenue sources. But on the other hand, that’s a liability if international markets disappoint.
So after this last stress test, I think you should consider regional bank stocks like Wintrust Financial (NASDAQ:WTFC). Wintrust focuses specifically on the Chicago market, where it was originally founded. While WTFC may not possess the vast riches and resources of the majors, management intimately understands its target audience. In other words, WTFC has its fingers on the Chicago economy’s pulse.
More importantly, Wintrust execs largely answer to local and regional needs, not foreign concerns. True, our economy is globally interconnected, so a financial institution can’t completely ignore international pressures. That said, WTFC doesn’t have to address issues that don’t directly relate to the core Chicago market.
Plus, Wintrust has the ultimate trump card: Stable performance. On a year-to-date basis, WTFC stock is up 13%. It’s not a groundbreaking haul by any means. However, it’s a lot better than the majors, most of which are flat or declining for the year.
Bank Stocks to Buy After the Stress Test: Deutsche Bank AG (USA)
For those who want to add some spice to their bank stocks list, I offer Deutsche Bank AG (USA) (NYSE:DB). Actually, Deutsche Bank is a barrel-load of spice. In almost any other circumstance, I would avoid DB stock. The German financial powerhouse suffers an identity crisis, along with a tough European market.
That said, the Fed included DB in its recent stress test along with other foreign banks, and the firm passed. Although it’s not the end-all, be-all, it’s a significant achievement and one that draws my attention as a speculative bet. And let me reiterate, this is pure speculation! Since January’s opening price, DB stock has dropped an alarming 43%.
But this massive selloff might be way overdone. For one thing, Deutsche Bank is in the middle of a restructuring program. Investors are skeptical because DB has announced previous reorgs in the past to no avail. Furthermore, management made substantial cuts in the company’s equities business, which means increased reliance on trading operations. That’s a revenue volatility risk that conservative investors understandably don’t appreciate.
However, Deutsche Bank isn’t some fly-by-night operation. At a 43% cut in market value, it really does look attractive to the gambler. Plus, its business is levered toward the European sector, and therefore, doesn’t deal heavily with non-European issues.
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As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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