Banking

UBS names 6 bank stocks to buy as successful stress tests open the door to buybacks and dividends — and highlights 2 laggards to avoid

  • Bank dividends and buybacks could take off after passing recent stress tests, UBS analysts said.
  • Lower stress capital buffers at big US banks will lead to substantial returns in the third quarter.
  • UBS named six bank stocks that stand out among the financial sector and two that trail the pack.
  • See more stories on Insider’s business page.

US banks largely passed recent key stress tests with flying colors, and investors will now reap the rewards via higher dividends and buybacks, UBS analysts wrote in a note on Thursday.

Positive late-June results from the 2021 Dodd-Frank Act stress tests, which measure whether banks with more than $250 billion in assets have enough capital to withstand losses in economic downturns, signal that banks are rebounding robustly from the coronavirus-induced

recession

But some institutions’ reports were stronger than others, UBS said, noting six firms that stood out and should return more capital to shareholders as well as two that didn’t stack up well to peers.

Two telling measures of financial institutions’ health based on the DFAST results are stress capital buffers, which are minimum capital reserves implemented by regulators, and Common Equity Tier 1 ratios, which compare a bank’s capital to its assets. Lower SCB percentages and higher CET1 ratios are more desirable and reflect solvency in

liquidity
crises.

Six financial sector winners from the recent DFAST results are Capital One (COF), Morgan Stanley (MS), Bank of America (BAC), PNC (PNC), Truist (TFC), and US Bancorp (USB), UBS analysts wrote. These firms should have little trouble raising returns to shareholders via dividend hikes and buybacks as soon as the third quarter of 2021.  

Capital One stood out with the highest CET1 ratio of its peers in the first quarter at 14.6%, more than double its 7% minimum, and is now authorized to buy back $7.6 billion of stock — more than 10% of its current market capitalization. Its stock is up about 58% year to date and has a 1% dividend.

UBS estimates that Capital One has the minimum SCB of 2.5%, along with Bank of America, Bank of New York, Northern Trust, PNC, Regions, State Street, Truist, and US Bancorp.

By contrast, UBS views Citigroup (C) and Wells Fargo (WFC) less favorably after mixed reports. 

The firm pegged Citigroup’s SCB at 3.1% and Wells Fargo’s at 3.2%, which are notably higher than peers. Citigroup’s estimated minimum CET1 ratio is 10.6%, UBS analysts said, adding that the bank should be able to maintain its target mark of 11.5%. Wells Fargo’s minimum CET1 ratio is estimated to be 9.7%, according to UBS.

UBS noted several risks for the financial sector, including an unexpected deterioration in credit quality and macroeconomic conditions, which would include unemployment spikes or a slowdown in the economic recovery. The analysts also warned investors about a competitive loan environment, regulation’s impact on revenue and operating costs, and weaker net interest margins from lower interest rates.

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