Bank of America Shows Soft Results in Recent Stress Tests

Bank of America

Shares of Bank of America (NYSE:BAC) were trading mostly in the red throughout Friday’s market session, after the results of the Federal Reserve-administered stress tests came back. The majority — twenty-nine of the thirty banks tested — proved able to pass, though one, Zion Bancorporation (NYSE:ZION), failed the test. However, Bank of America reportedly “struggled” as well, sending ripples of concern through its investor base. 

The banks had to show that they could remain well-capitalized, with Tier 1 common equity ratios of at least 5.0 percent, through a nine-quarter “severely adverse” economic scenario, The Street explained. Only eighteen banks were tested last year with the Dodd-Frank Act Stress Tests, or DFAST; Zion was one of the newcomers.

Though it barely passed, Bank of America had the third-weakest Tier 1 equity ratio, at 6 percent. Though one bank, M&T Bank, fell between it and Zion (which had a ratio of 3.5 percent), it “is in the midst of getting its Bank Secrecy Act and anti-money laundering compliance house in order,” since it’s gearing up to finish off the delayed acquisition of Hudson City Bancorp HCBK.

The testing scenario set forth this year assumed an increase in the U.S. unemployment of 4 percent, The Street said. This implies a fictional unemployment rate peaking at 11.25 percent in mid-2015, and includes a decline in real U.S. GDP of nearly 4.75 percent through the end of 2014, a 50 percent decline in equity prices, and a 25 percent decline in home prices.

The adverse scenario portion also international variables, like recessions Europe and Japan, and slowing growth in Asia.

Source: Getty Images

Source: Getty Images

The second component to the test was the CCAR, or Comprehensive Capital Analysis and Review. This takes into account banks’ intentions to issue forth excess capital via dividend increases, share buybacks, or acquisitions; the results from this portion of the test will be revealed March 26.

Benzinga notes that Bank of America’s test result estimates “assume no changes to the company’s current common share dividends (and contractually obligated payments on other regulatory capital instruments) and include the common stock repurchases previously disclosed for the quarter ended December 31, 2013 in accordance with the Dodd-Frank Act Annual Stress Test requirements,” and, obviously, the test results do not forecast the firm’s future financial performance.

Nonetheless, Bank of America shares struggled to break out of the red throughout Friday trading, as investors seemingly took the firm’s soft results in the test as an indicator of the bank’s worth in reality.