The first glance
The headlines surrounding the recently released results were quite positive. In the story from The Wall Street Journal entitled, Fed 'Stress Test' Results: 29 of 30 Big Banks Could Weather Big Shock, had an introduction which noted, "Results Could Clear Way For Dividends, Share Buybacks."
The first paragraph said simply, "The Federal Reserve's annual test of big banks' financial health showed the largest U.S. firms are strong enough to withstand a severe economic downturn, a sign that many will get the green light soon to reward investors by raising dividends and buying back shares."
Only one bank, Zions Bancorp (NASDAQ:ZION) failed to be adequately prepared for the stressed scenario, with a common capital ratio of 3.5% following the severely adverse scenario, which involved a 50% dip in stock prices, a skyrocketing unemployment rate, and home prices falling by 20%. This level of 3.5% at Zions was well below the 5% required by the Federal Reserve. Yet as shown in the chart below, in aggregate, the banks improved significantly:
And when you consider the 30 banks required to undertake the stress test this year had estimated total losses of $366 billion through the nine quarters of stress versus the 18 banks witnessing $462 billion last year, it's no wonder many believed the banks have finally recovered.
The reason for fear
The problem is one thing notably absent from headlines is the reality Bank of America, Citigroup and JPMorgan Chase (NYSE:JPM) each had results which were worse this year versus last year.
Under the almost identical severe stress scenarios, we can see Bank of America, Citigroup and JPMorgan Chase actually lost ground in 2013, whereas Wells Fargo (NYSE:WFC) saw its results improve significantly:
And while at first glance Citigroup appears to have done better than Bank of America and JPMorgan Chase, it turns out the Federal Reserve projected its net losses after nine quarters under the severely stressed scenario to balloon from $28.6 billion, following the 2012 test, to a staggering $45.7 billion in 2013:
The dividend fear
As a result of the remarkable improvement in the bottom line results from both Bank of America and Citigroup in 2013 -- Citigroup rose from $7.5 billion in 2012 to $13.9 billion in 2013 and Bank of America was up from $4.2 billion to $11.4 billion -- many have suggested the dividends will surely jump in 2014 for each of the banks with the one penny per quarter payout.
Yet when you consider each of those banks apparently are seemingly in worse shape under a stressed scenario now versus where they were last year, one has to wonder if the dividend boost is further away than one anyone would prefer.