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Analyst Says Fed's Stress Test Measures An 'Earnings Issue'

Jayson Derrick

The Federal Reserve's new restrictions on banks' ability to pay dividends and buyback shares is a "big deal," but there are still opportunities for investors, Raymond James analyst Michael Rose said on CNBC's "Worldwide Exchange."

What Happened: The Fed's move to restrict shareholder returns is more of an "earnings issue" as opposed to a capital or liquidity issue, Rose said.

The Fed deserves credit for undertaking the right measures to bolster the banking system, the analyst said. 

The fact that banks need to undergo a second round of "stress tests" will add additional confidence that banks are prepared to navigate through "very choppy waters," he said. 

Why It's Important: Banks are likely to emerge from COVID-19 pandemic as a "source of strength" as opposed to being "the root of the cause" during the 2008 crisis, Rose said. 

Banks also remain "very well" capitalized with "pretty solid" pre-tax pre-provision earnings, the analyst said.

he recommends defensive mid-cap names like Prosperity Bancshares, Inc. (NYSE: PB) and Home Bancshares Inc (NASDAQ: HOMB). Beta-themed plays include Regions Financial Corp (NYSE: RF) andWintrust Financial Corp (NASDAQ: WTFC).

What's Next: Investors won't have any clarity on loan loss provisions and credit losses until the end of 2020 or even 2021, Rose said.

The peak will likely occur in the next quarter or two, as measures like the PPP need to "run its course" first, the analyst said. 

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