Trepp's Predictions for the 2018 CCAR Stress Test Results.
The Fed is due to release its stress test and capital plan review results for major banks in June.
This marks the eighth year of large bank stress testing and will encompass the biggest list of banks yet.
With the addition of six banks since last year, a total of 38 institutions will be evaluated this year.
These include the largest banks in the US as well as several foreign-owned banks, with combined assets of $16.2 trillion as of yearend 2017.
Two of the most important elements from the CCAR analysis will be the credit impacts (loan losses) from the application of the Severely Adverse scenario and the resulting implications for capital ratios and capital policy, including the banks' ability to fund shareholder dividends.
While this year's Severely Adverse scenario is somewhat harsher than last year's, aggregate loan losses will climb modestly.
With loss estimates largely in line with last year's, we expect a majority of the CCAR banks to receive approvals to increase dividends to shareholders.
In the analysis presented below, we have relied on results from Trepp's T-CAST solution --which produces comprehensive balance sheet, income statement, and capital projections--to give us a sense of what the Fed's results will look like.
In 2017, we found there was a 97% correlation between T-CAST results and the Fed's own results for the CCAR banks.
Loan Losses on the Rise
When compared to the results from 2017, projected credit losses in the Severely Adverse scenario will climb by about $12.3 billion this year. About 60% of that increase will be from the six new additions to the list of banks being tested this year, while the remaining 40% will be from increased loss estimates for the 2017 CCAR bank cohort.
Looking at individual loan categories, unsecured business lending (C&I loans) and credit cards would represent the main sources of losses in a major downturn, both of which result from banks' large loan holdings in these areas and the severity of recession impacts on these loan types. Secured loan types, such as residential and commercial real estate (CRE), would fare comparatively better.
The Bottom Line: Dividends to Increase, but by How Much?
From the banks' perspective, the most important result from the stress testing process is whether the Fed will approve any dividend increases.
This year, we expect most of the banks will receive permission to raise their dividends, although the increases may not be as large as last year.
In total, 27 of the CCAR banks (79%) received approval to raise their dividends last year, up from 23 (70%) of the banks in the previous year. This year, a similar number of banks will receive approvals to raise their dividends.
Payout ratios have been increasing, but predominantly remain moderate. Ultimately, the size of increases this year may not match last year's.
The information provided is based on information generally available to the public from sources believed to be reliable.
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|Title Annotation:||Trepp[R]: CRE WEEK IN REVIEW|
|Publication:||Wenatchee Business Journal|
|Date:||Jul 1, 2018|
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