News

Big U.S. lenders are expected to show they have ample capital to weather any renewed turmoil during this week's Federal Reserve health checks but will be conservative on investor payouts amid economic and regulatory uncertainties, analysts said.

The central bank on Wednesday will release the results of its annual bank "stress tests" which assess how much cash lenders would need to withstand a severe economic downturn and how much they can return to investors via dividends and share buybacks.

Market Overview:

• Wall Street giants like JPMorgan, Citi, and Bank of America usually attract the most scrutiny.


• Mid-sized lenders like Citizens, KeyCorp, and Truist are also in the spotlight.


• Analysts expect all 32 banks will show capital in excess of regulatory minimums.

Key Points:

• Citi and Goldman are expected to perform well due to changes in their balance sheet mixes.


• KeyCorp and Truist might experience an increase in their stress capital buffers.


• Discover Financial Services' compliance problems helped make it a takeover target.

Looking Ahead:

• The Fed's 2024 "severely adverse" scenario envisages a peak unemployment rate of 10%.


• The test includes a 40% slump in CRE prices, stressing landlords.


• Investors will be watching how banks' CRE loans perform, especially for regional banks.

The industry has performed well in recent years, although some critics say the tests are too easy. Analysts expect all 32 banks will show capital in excess of regulatory minimums. This year's test is similar in its severity, but includes around 10 banks that are tested less frequently. The Fed's 2024 "severely adverse" scenario envisages the unemployment rate jumping 6.3 percentage points, compared with 6.4 points in 2023, to a peak of 10%. It includes sharper declines in the stock and bond markets this year, but slightly less severe dips in home prices and the overall economy.

As with 2023, the test also envisages a 40% slump in CRE prices, an area of concern as lingering pandemic-era office vacancies and high rates continue to stress landlords.

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