In the wake of the coronavirus outbreak, the stress test designed by the Fed to gauge the health of the nation’s banking system has been expanded this year. And the finding is quite heartening! The Fed has categorically said that the biggest U.S. banks are currently capable of withstanding the crisis and are “sufficiently capitalized.” 

 

But the central bank did impose restrictions on dividend payouts and buybacks. Banks are supposed to announce their dividend plans in the near term, but as per the new regulations, their payouts cannot be greater than their average quarterly profit of the past four quarters. Wells Fargo, in particular, may be in trouble since its dividend payout will breach the new threshold set by the Fed. The banking behemoth’s dividend payout in the third quarter is expected to be 150% of its average profit of past four quarters.

 

Nonetheless, the Fed has ordered cap on share buybacks, especially in the third quarter. By the way, major banks had decided to halt buybacks during the second quarter. Here, we should note that buybacks are the main way banks return capital to shareholders.

 

However, the Fed’s move to limit banks’ buybacks and dividends would certainly help lenders stay afloat amid the recession. After all, if the pandemic takes longer to subside, banks could easily experience losses quite similar to the financial crisis of 2008. Banks will invariably suffer losses on consumer debt, including auto loans and mortgages as well as corporate debt. Meanwhile, limiting shareholder payouts could easily help banks get the required capital cushion to bear the financial stress in the near future.

 

Having said that, big U.S. banks have already set aside billions of dollars to cover the wave of loan defaults expected in the months ahead. The Fed has given three likely scenarios of loan losses. Firstly, if the economic recovery is V-shaped, it’s expected that loan losses will come in at nearly $560 billion. For a more prolonged downturn leading to a U-shaped recovery, loan losses are estimated at $700 billion. And if there is a W-shaped recovery, in which the economy quickly bounces back but then takes another beating, it would result in loan losses of $680 billion.

 

It’s also worth pointing out that the Paycheck Protection Program and the unemployment benefits provided by the government may to some extent reduce consumer debt at least. 

 

Meanwhile, federal regulators are about to ease restrictions from the Volcker Rule created in the aftermath of the Great Recession, a development that bodes well for banks. After all, loosening up of restrictions will help banks make large investments in venture capital. The new rule will free up as much as $40 billion for banks and facilitate capital formation.

 

 

With the Fed saying that big banks are strong enough to weather tough economic situations amid the coronavirus outbreak along with easing of Volcker Rule, the lenders are surely not stressed out at the moment. Given the positives, it’s worth keeping an eye on a few fundamentally-sound major banks. All three companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

First on the list is Bank of America Corporation (BAC Quick QuoteBAC - Free Report) . The bank’s current value of assets per its balance sheet is almost $170 billion, about three times what it was during the financial crisis of 2008. Bank of America set aside $3.6 billion in the first quarter to tackle any loan losses.

 

Rising loans and deposits, manageable expenses and expansion into new markets are presently boosting Bank of America’s financials. Technological upgrades are also likely to help in cross-selling opportunities. Notably, Bank of America has an impressive earnings surprise history, having outpaced the Zacks Consensus Estimate in three of the trailing four quarters.

 

Moreover, the company’s expected earnings growth rate for the next year is 50.7% compared with the Banks - Major Regional industry’s projected increase of 31.5%. 

 

Second, of course, is JPMorgan Chase Co. (JPM Quick QuoteJPM - Free Report) . The bank is well-capitalized and has a current tangible book value of $180 billion. To top it, the bank has delivered 7% of compounded annual growth in revenues and 11% of compounded annual growth in earnings in the past five years.

 

What’s more, JPMorgan’s solid loan and deposit balances, the acquisition of InstaMed, solid liquidity position and plans to expand the branch network in new markets will continue supporting profitability.

 

The bank surpassed the Zacks Consensus Estimate for earnings in three of the trailing four quarters. The company’s expected earnings growth rate for the next year is 71.4% compared with the industry.

 

The last on the list is U.S. Bancorp (USB Quick QuoteUSB - Free Report) . The company has enough cash flow and pays out only 34% of its cash flow as dividend.

 

U.S. Bancorp’s solid business model, core franchise and diverse revenue streams are likely to support its performance. It has already shown an impressive earnings surprise history, having beaten the Zacks Consensus Estimate in three of the trailing four quarters and meeting in one.

 

The company’s expected earnings growth rate for the next year is 35.6% compared with the industry.

 

 

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.      

 

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.