After successful stress tests, shares of the largest US banks soared. The findings of the second such study (since the beginning of the pandemic) have been announced by the Fed: the banking sector has proven to be sufficiently robust to endure a fall in income of up to $600 billion. And in each of the key scenarios: from a rapid reduction in credit payments in the short term, to a gradual and prolonged crisis. In this respect, the regulator relaxed the dividend payment limits, which were carried out following the results of the summer stress tests.
JPMorgan Chase and Goldman Sachs shares went up dramatically following the news, which increased from 3 percent to 6 percent even before the start of the main session on Monday. According to the Fed, banks built loan loss reserves totaling $100 billion during the crisis, which is a multiple of the worst-case scenario. This made it possible for future payments to free up some of the money. In the first quarter of 2021, previously postponed dividends and buybacks are planned. At their own discretion, banks are permitted to set the payment bar. JPMorgan straightaway reported a $30 billion buyout in next year.
Statements were issued by JPMorgan and Morgan Stanley, saying they intended to restart share buybacks beginning next quarter. Citi and Goldman said that next year they plan to restart such purchases. Brian Moynihan, CEO of Bank of America, has said that his company plans to buy back stock as soon as it is permitted. According to Bloomberg, the six biggest U.S. banks could repurchase as much as $11 billion of stock in the first quarter under the current distribution policy.
After a fresh wave of growth, the stocks of the largest U.S. banks remain undervalued. JPMorgan Chase is now worth $123, for instance, which is less than 1 percent of its fair value. Goldman Sachs looks more interesting: $250 with up to 6 percent upside. However, in our view, they can be purchased much cheaper on the horizon of the next quarter. We foresee a correction of at least 7 percent on the horizon in these shares before the end of winter.