2 July, 2020
The results of the 2020 Comprehensive Capital Analysis and Review (CCAR) stress tests of the largest US banks have revealed that despite COVID-19 and the prospect of pandemic-led loan losses, the sector remains in good shape. In this investment note, our US bank portfolio management team takes a closer look.
On Thursday 25 June, the US Federal Reserve Board (the Fed) announced the results of the 2020 CCAR stress test of the country’s largest banks, which this year included additional analysis given the ongoing pandemic1. The supplementary analysis sought to assess how resilient banks are to the current downturn, as it differs from a more typical business–cycle-led-recession. All of the banks passed the stress test; however, the initial market reaction was negative, given investor caution about the recent increase in global coronavirus cases.
Although there will be a range of opinions, the outcome was largely in line with our expectations. Fed Vice Chairman for Supervision Randal Quarles observed that “the banking system has been a source of strength during the crisis and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.”1 This is an important differentiator from the global financial crisis when the banking system was at the heart of the downturn. After the first round of Fed stress tests in 2009, the banks were collectively told to raise US$75 billion in additional capital.
As expected, the Fed kept its share buyback restrictions in place. The Street does not anticipate this will start again until 2021 when the economic recovery is expected to be more firmly established2. Prior to the Fed’s release of results, investors appeared to be more concerned about how the Fed would treat dividends, which were subsequently capped at second-quarter levels and below recent earnings. However, most of the banks should be able to maintain their current dividends under this framework. That said, it could be a limiting factor for a small group of banks. After the market close on Monday 29 June, we received clarity as individual banks announced their capital plans and the majority reaffirmed their dividends going forward, which has been positively received by the markets.
To reflect the current stress tests, an additional requirement this year is for the banks to resubmit and update their capital plans in the third quarter. We view this as appropriate, given the dynamic nature of the recovery.
We would note that the COVID-19 scenario analysis showed that the banks could suffer significant pandemic-driven loan losses. However, we believe that revenue, capital, and loan-loss reserves are sufficient to absorb these potential losses. Additionally, the stress tests scenarios were extremely severe relative to the current situation. For example, one parameter assumed that US unemployment would peak at 19.5% – meaningfully worse than today’s levels. Moreover, the Fed excluded the mitigating effects of government stimulus payments and expanded unemployment benefits that have provided significant support to the economy. Therefore, we think it is unlikely that loan losses will approach these worst-case scenarios.
What the stress-test process has shown is the strength of the banks’ balance sheets, even under extreme stress. Furthermore, valuations remain historically low on both a relative and absolute basis. As such, we believe that US banks offer long-term investors a compelling opportunity.
1 Press release of the Board of Governors of the Federal Reserve System, 26 June 2020.
2 Manulife Investment Management, June 2020,” The World Bank, October 2019.
Corporate governance in Japan—progress in six key areas
Prominent cases of corporate scandals in Japan in recent years seems to suggest that corporate governance in the country has weakened. The reality, however, is quite different.
Investment implications of the Mainland real-estate debt crisis for Greater Bay Area (GBA)
We discuss the implications of the current real-estate debt crisis for equity investors, as well as various opportunities in the Greater Bay Area.
Asia-Pacific (ex-Japan) equities: Strategic opportunities amid a diverging landscape
Although the divergence in regional performance is expected to continue, we believe the broad Asian equity universe offers attractive opportunities for active managers to find diversification and reasonably valued companies
The information provided on this website is for informational purposes only and is intended solely for use by Singapore residents and is not intended for distribution to, or use by, any person or entity in the United States, or any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) and/or its affiliates (collectively hereafter "Manulife") or any of Manulife's products or services to any registration requirement within such jurisdiction or country. Nothing on this website shall be construed as financial advice or an offer, invitation, solicitation or recommendation by or on behalf of Manulife to any person to buy or sell any Fund and is no indication of trading intent in any Fund managed by Manulife. None of the information or analyses presented are intended to form the basis for any investment decision, and no specific recommendations are intended.
Investments in any Fund are not deposits in, guaranteed or insured by Manulife and involve risks. The value of units in any Fund and any income accruing to it may fall or rise. Past performance of the Fund is not necessarily indicative of future performance. The Fund may use or invest in financial derivative instruments. Investors should read the prospectus and seek advice from a financial adviser, before deciding whether to subscribe for or purchase units in any Fund. In the event an investor chooses not to seek advice from a financial adviser, he should consider whether the Fund(s) is/are suitable for him. Copies of the prospectus and the product highlights sheets can be obtained from Manulife or its distributors, for further details (including the risk factors) and charges.
The Manager shall have the absolute discretion to determine whether a distribution is to be made in respect of any Fund as well as the rate and frequency of distributions to be made. The intention of the Manager to make the distribution and the distribution yield for the Fund is not guaranteed, and the Manager may review the distribution policy depending on prevailing market conditions. Distributions may be made out of income, net capital gains and/or capital. Past distribution yields and payments are not necessarily indicative of future distribution yields and payments. Any payment of distributions by the Fund may result in an immediate decrease in the net asset value per unit.
All advertisements or publications provided on this website have not been reviewed by the Monetary Authority of Singapore.
Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G)