U.S. Markets closed

Deutsche Bank Fails Stress Test, Plus New Income/Spending Results

Mark Vickery
Comtech Telecommunications (CMTL) closed the most recent trading day at $26.47, moving +1.26% from the previous trading session.

Friday, June 29, 2018

Prior to the opening bell on this last day of Q2 trading, we see new Income and Spending economic metrics, along with results from this week’s latest stress test from the Fed on the U.S.’ biggest banks. On both ends, while overall news was generally good, there were notable points of weakness.

For May Personal Income, the headline figure came in exactly as expected: +0.4%. This effectively doubled our last look, the downwardly revised 0.2%. Consumer Spending, on the other hand, was half what was expected, to 0.2%. The previous month’s downward revision to 0.5% was still relatively impressive. But spending in the U.S. appears to be cooling, at least month over month.

Digging beneath the headlines, quickly: “real” personal spending came in at 0.3%, while the deflator reached 0.2%. Month over month “core” got to 0.2%, and year over year 2.0%. This is an improvement of 20 basis points above the April year-over-year read. Pre-market activity is not getting excited over any of these numbers to this point; incremental, steady growth looks to still be the name of the game.

Results from the latest round of bank stress tests are in, with all but one of the 35 total major financial institutions in the U.S. passing this week’s second level. The domestic wing of Deutsche Bank DB was the only bank to fail the test, with the Fed citing “widespread critical deficiencies” in capital planning controls. Deutsche Bank did manage to pass the first level last week.

Last week’s test looked at capital levels for banks if faced with a severe recession, not unlike the one we saw roughly a decade ago. All 35 banks passed this measure of competency. This week’s second test, by comparison, checked how banks paying out dividends, making stock repurchases, etc. would hold up under similar circumstances. The Fed objected to Deutsche U.S.’ overall capital plan; it is now expected the company will go back and realign its capital management strategies.

Deutsche Bank’s parent company, based in Frankfurt, Germany, has been going through an historically difficult period — posting losses for three straight years and trading down on the NYSE -42% year to date. Even before this latest negative headline, DB had already been placed on the Fed’s list of troubled banks. Questions regarding the bank’s credit worthiness lead to higher transaction costs, keeping the company in a tough cycle from which to escape. The stock currently carries a Zacks Rank #5 (Strong Sell) with a Style Score (Value - Growth - Momentum) of F.

Three banks that passed both levels of the stress test — JPMorgan JPM, Bank of America BAC and Wells Fargo WFC — have all decided to raise dividend yields and buy back shares of stock following the results. In fact, more than a dozen banks subjected to the tests have decided to go this route in the wake of the Federal Reserve’s latest challenge.

Futures are up in today’s pre-market, following a healthy day of trading in the EU and Asia. That said, U.S. indexes will have to rally strongly today to reach their highs from earlier this week.

Mark Vickery
Senior Editor

Questions or comments about this article and/or its author? Click here>>


Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
Wells Fargo & Company (WFC) : Free Stock Analysis Report
Bank of America Corporation (BAC) : Free Stock Analysis Report
Deutsche Bank Aktiengesellschaft (DB) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report