Feds give largest US banks passing grade on annual stress tests

The Federal Reserve has signed off on the nation's 23 national and super-regional banks increasing quarterly dividends and authorizing larger share-purchase programs.

The Fed's board of governors released Wednesday the results of its annual stress tests, as required by the federal Dodd-Frank Act.

The tests determine whether those banks have enough capital to weather a significant economic downturn and maintain a normal customer lending capability.

The tests evaluate the resilience of large banks by estimating their capital levels, losses, revenue and expenses under hypothetical scenarios over nine future quarters.

Among the affected banks are Bank of America Corp., PNC Financial Services Group, Truist Financial Corp. and Wells Fargo & Co., all with a major Triad presence.

The stress-test scenarios are created annually by the Fed, along with the Federal Deposit Insurance Corp. and the U.S. Office of the Comptroller of the Currency.

However, the 2023 evaluation received significantly more scrutiny in the aftermath of the failures of three high-profile banks over the past 12 months.

For example, for the first time the Fed board "conducted an exploratory market shock on the trading books" of the largest banks - JPMorgan Chase & Co., Bank of America, Citigroup and Wells Fargo.

The hypothetical shock included greater inflationary pressures and higher rising interest rates than the other 29 banks were measured by.

The Fed said all four banks' trading books "were resilient to the right rate environment tested."

"The results confirm that the banking system remains strong and resilient," Michael Barr, the Fed's vice chairman for Supervision, said in a news release.

"At the same time, this stress test is only one way to measure that strength.

"We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks and other stresses."

Typically, banks disclose dividend and share-repurchase plans within weeks of gaining Fed permission.

The current quarterly dividends are 52 cents for Truist, 30 cents for Wells Fargo, 22 cents for Bank of America and $1.50 for PNC.

Each bank tested remained above their minimum capital requirements, despite total projected losses of $541 billion.

The board said stress tests "help ensure that large banks can support the economy during economic downturns."

The scenario included: a severe global recession with substantial stress in commercial real estate (down 40%); "a substantial increase in office vacancies" beyond those already being experienced as a COVID-19 ripple effect of the work-from-home pattern; a 38% decline in homes; a U.S. jobless increasing to 10%; and economic output declining "commensurately" with the higher unemployment rate.

For stress-test purposes, commercial real estate loans are for offices, hotels in urban locations or locations that tend to attract business travelers, shopping malls and strip malls, according to the Bank Policy Institute, a nonpartisan public policy, research and advocacy group that represents the nation's leading banks.

"The individual bank results from the stress test will factor directly into a bank's capital requirements, mandating each bank to hold enough capital to survive a severe recession," the Fed said.

"If a bank does not stay above its capital requirements, it is subject to automatic restrictions on capital distributions and discretionary bonus payments."

Individual bank scenarios

Truist projected a $9.5 billion net income loss, factoring $11.8 billion in revenue, a $20.3 billion loan-loss provision and $900 million in credit losses on investment securities.

Of the $19.1 billion in loan losses, $5.1 billion was in domestic commercial real estate, $5 billion in "other" consumer loans and $4.6 billion commercial and industrial lending.

Wells Fargo projected an overall $32.9 billion net income loss.

It estimated $35.5 billion in net revenue and requiring a loan-loss provision of $54.9 billion. There also would be $12.2 billion in trading and counter-party losses.

Of the $54.2 billion in loan losses, $13.6 billion was projected in domestic commercial real estate, $12.7 billion in commercial and industrial lending, $10.3 billion in "other" loans, and $8.2 billion from credit cards.

Bank of America projected an overall $43.7 billion net income loss.

It estimated $43.2 billion in net revenue and requiring a loan-loss provision of $54.7 billion. There also would be $8.9 billion in trading and counter-party losses and $2.3 billion in "other" losses.

Of the $54.4 billion in loan losses, $16.6 billion was projected in commercial and industrial lending, $14.9 billion from credit cards and $7.2 billion in domestic commercial real estate.

PNC projected an overall $3.6 billion net income loss.

It estimated $14 billion in net revenue and requiring a loan-loss provision of $17.2 billion.

Of the $17.8 billion in loan losses, $7.8 billion was projected in commercial and industrial lending and $4.7 billion in domestic commercial real estate.

[email protected]@rcraverWSJ