Banks Sail Through Fed Stress Tests ... But Should You INVEST in Their Shares?

Since the financial crisis of 2007-2009, government agencies have taken a number of steps to ensure that banks can weather another economic downturn. In a perfect world, the next downturn shouldn’t be as bad as the last one — but it’s always better to prepare for the worst.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was one of the signature steps lawmakers took to increase regulation and decrease the chances of another financial disaster. It was signed into law by former President Obama on July 21, 2010.

In addition to the stricter Dodd-Frank banking regulations, the Federal Reserve now also conducts an annual Comprehensive Capital Analysis and Review (CCAR). CCAR is a capital stress test that evaluates the capital planning process and capital adequacy of the largest U.S.-based bank holding companies. A bank can be subject to a quantitative or qualitative review, and sometimes both.

In the past, some banks stumbled during the CCAR process. They failed to convince the regulators that they had the proper internal processes to work through financial downturns.

But in the just-completed tests for 2017, 33 out of 34 banking companies subject to the tests sailed right through the tests. Only Capital One Financial Corporation was singled out by the Fed, which said it had to submit a new capital plan within six months to address some weaknesses.

Banks are Safe … But are They “BUYs”?

In short, the Fed’s review concluded that banks as a group had acceptable capital plans. That indicates a collective vote of confidence in the U.S. banking system, showing that it’s in pretty good shape right now. But does that mean bank stocks make a good investment? Let’s use the Weiss Ratings to help decide.

Start by understanding that our firm issues two kinds of grades: Weiss Safety Ratings for the underlying banks and Weiss Investment Ratings for the publicly traded parent companies of those banks.

Next, take a look at this table of the 34 banks the Fed stress tested. Most of the banks reviewed by the Fed have subsidiary companies that are rated for safety by Weiss. We also issue investment ratings for all of the ultimate, publicly traded parent companies.

In some cases, the U.S.-based subsidiaries are just a portion of much larger foreign-based mega-banks. That’s the case with MUFG Americas Holdings Corp., which is part of the $2.6-trillion-in-assets Japanese conglomerate Mitsubishi UFJ Financial Group. It has American Depository Receipts that trade here under the ticker symbol “MTU.” We rate them a “C” (HOLD).

But overall, Weiss has concluded that 56% of the publicly traded parent companies deserve a BUY Rating. Most of the remainder received no worse than HOLD Ratings, with only one being a SELL

Parent Companies’ Investment Rating

That confirms that most banks are not only relatively safe and sound, but also worthwhile to consider as investments. As always, you can check the investment ratings of any other bank by using the Weiss website.

Think Safety,

Remi Lukosiunas

Money and Banking Edition, By Remi Lukosiunas, Financial Analyst Remi Lukosiunas, a Financial Analyst, joined Weiss Ratings in 2014 with a financial services background in internal audit and the credit union industry. Remi conducts banking, credit union, insurance and investment research. He has also written extensively on stocks and investing using ratings as a guide. Remi is a graduate of Florida State University with a degree in multinational business.