The Banking Report Card : Stress-Test Results of Top Wall Street Banks



(Bloomberg) — Citigroup Inc.’s plans to return capital to shareholders got the cleanest approval from the Federal Reserve among top Wall Street banks, one year after the firm failed the regulator’s annual stress tests.
Bank of America Corp. got a conditional pass requiring it to shore up internal processes and resubmit its plan for managing capital, while Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley cleared only after revising proposals, the Fed said Wednesday in a statement.

U.S. units of Deutsche Bank AG and Banco Santander SA failed because of qualitative concerns about their processes. The Fed didn’t place any conditions in passing Citigroup or 24 other firms, including Wells Fargo & Co.
Michael Corbat, Citigroup’s chief executive officer, had staked his job on passing this year’s test after the Fed found the bank’s processes inadequate last year. He spent more than $180 million to improve the bank’s systems and asked Eugene McQuade, a veteran executive with close regulatory ties, to delay his retirement to oversee this year’s submission.
The tests are a cornerstone of the Fed’s strategy to prevent a repeat of the 2008 financial crisis and another government bailout of the largest U.S. banks. The results released Wednesday are the annual exam’s second and final round, determining whether lenders can withstand losses and still pay dividends, buy back stock or make acquisitions.
Analysts estimated before Wednesday’s results that publicly traded U.S. banks subject to the review were strong enough to boost quarterly shareholder payouts 53 percent on average, disbursing $109 billion over the next 15 months. The Fed didn’t specify how New York-based Goldman Sachs, JPMorgan and Morgan Stanley altered their proposals.
Citigroup’s Payout
Citigroup, which pays a token 1-cent dividend after last year’s failure, will lead increases with a 60-fold jump in quarterly disbursements through dividends and stock buybacks, according to seven analysts’ estimates compiled by Bloomberg. While payouts from Wells Fargo and JPMorgan will climb less than average, the rewards will remain the largest among the U.S. banks tested, the estimates show.
Banks can disclose details of their capital plans as early as Wednesday. If all of the banks that passed return the capital they asked for, they will pay out almost 60 percent of their projected income over five quarters, a senior Fed official said.
Failing the test can mean banks have to forgo increases to capital payouts, forcing executives to shore up balance sheets or internal systems while facing shareholders eager for more cash. The U.S. units of Santander, Royal Bank of Scotland Group Plc, HSBC Holdings Plc failed last year because of the Fed’s so-called qualitative look at risk management, corporate governance and internal controls.
BofA Faulted
Citigroup’s Tier 1 common ratio fell to a minimum of 7.1 percent under the worst-case economic scenario in the test after taking into account the firm’s planned capital actions. With the pass, Corbat, 54, ends a year of turmoil that included the Fed’s rejection of the New York-based bank’s plan last March because of what regulators described as deficiencies in the firm’s processes for projecting revenue and losses across its global operations.
Bank of America’s revenue and loss models and parts of its internal controls were lacking and need to be resubmitted by Sept. 30, the Fed said Wednesday. If the lender hasn’t fixed its capital planning by then, the Fed can restrict payouts.
Bank of America, led by CEO Brian T. Moynihan, disclosed Feb. 25 that regulators had demanded changes to models, including those for wholesale credit, which would probably decrease the Charlotte, North Carolina-based company’s capital ratios. The Fed didn’t say whether the requested changes in models were related to its critique of Bank of America’s stress-test process.
Deutsche Bank
Deutsche Bank Trust Corp. and Santander Holdings USA will be restricted from paying dividends to their foreign parent companies or to any other shareholders. That may not have a significant impact, because a Fed rule approved last year will require foreign banks to inject more capital into their U.S. units by July 2016.
That rule forces the largest foreign firms to consolidate U.S. operations into one subsidiary and abide by the same capital and liquidity minimums as domestic peers. It came after lenders including Deutsche Bank and Barclays Plc dropped the bank holding company status of their primary U.S. units.
Deutsche Bank Trust represents about 15 percent of the parent company’s assets in the U.S., a Fed official said last week. It’s a holding company for several units of the German lender, including a U.S.-based trust business that accepts deposits and groups that provide back-office services to the bank, and doesn’t include the firm’s broker-dealer unit, according to a regulatory filing last year.
Severe Scenario
Past Fed tests let banks make payouts in the four quarters that followed. This time, the test will determine payouts for five quarters.
Last week, the Fed said all 31 banks have sufficient capital to absorb losses during a sharp and prolonged economic downturn. That review didn’t factor in the companies’ capital plans. It was the first time since the central bank started stress tests in 2009 that no firm fell below any of the main capital thresholds.
Goldman Sachs got closest among the top six U.S. banks to breaching regulatory thresholds in the first phrase of the test, surpassing the 8 percent minimum for total risk-based capital by 0.1 percentage point. Morgan Stanley’s ratio in three capital measures fell to within 1 percentage point of the required minimum. Firms can modify their capital plans in the week before the second round results are released.
Goldman Sachs, which paid out the highest percentage of earnings among Wall Street firms in 2014, had to resubmit its capital plan to win Fed approval for a second straight year. The firm has pushed to give back capital to shareholders as it tries to boost return on equity, which has been 11 percent in each of the past three years.
Regulators don’t hold it against firms if their original capital plan is so aggressive that they are forced to resubmit, or if they do it in subsequent years, because it’s now a part of the process, a senior Fed official said.
The Fed subjects banks to two dire economic scenarios, with the most severe downturn marked by a 60 percent plunge in stock indexes, a 25 percent decline in housing prices and an unemployment rate that tops out at 10 percent.
Last week’s results showed that loan-loss estimates for the 31 banks totaled $490 billion under that worst-case scenario, down from $501 billion for the 30 banks tested last year. The losses include a $102.7 billion hit to trading, led by JPMorgan’s $23.6 billion. The heaviest damage was in consumer lending, with 39 percent of projected losses from such activity as mortgages and credit cards.

Cliffs Natural Off The Cliff AVOID


iron (Photo credit: Wikipedia)


NYSE : US$18.46

Shares of Cliffs Natural Resources dropped on Wednesday after Morgan Stanley downgraded the stock and Credit Suisse slashed its price target on the shares.

A big increase in the supply of iron ore pellets in the Great Lakes region over the next three years could hit earnings from Cliffs’ U.S. iron ore segment hard, Morgan Stanley said in a note to clients. Credit Suisse also sees a looming pellet surplus in the Great Lakes and said Cliffs may need to consider “drastic solutions” to shore up its balance sheet in the next 12 months, from selling iron ore assets in the Asia-Pacific region to a multibillion-dollar equity offering. ”

Major reform is required if this business is to survive the next commodities cycle, in our view,” read the brokerage’s note. U.S. iron ore was responsible for about 60 percent of Cliffs’ earnings before interest, taxes, depreciation and amortization (EBITDA) in 2012, Kurtz said, and the segment’s EBITDA could drop by half.

Even before Wednesday’s decline, Cliffs’ stock had fallen 70% over the past 12 months. In February the company reported a quarterly loss, hurt by a $1 billion writedown and iron ore prices that swooned in the autumn on weak demand from China, the world’s largest producer and consumer of steel.

Morgan Stanley Turnaround

English: Morgan Stanley's office on Times Square

English: Morgan Stanley’s office on Times Square (Photo credit: Wikipedia)

Morgan Stanley

(MS : NYSE : US$22.38)
Morgan Stanley swung to a fourth-quarter profit, boosted by sharp revenue gains in its investment banking and trading business.

Overall, the bank reported a fourth-quarter profit of $507 million, compared with a year-earlier loss of $250 million. Per-share earnings came in at 25 cents compared with a loss of 15 cents a year earlier. Banks have to take an accounting charge when their earnings improve and the price of their own bonds rises. Stripping out the impact of a debt valuation change, or DVA, earnings from continuing operations were 45 cents, compared with a loss of 20 cents, a year earlier.

Revenue rose 32%  to $7 billion, though excluding DVA, it climbed to $7.5 billion. Analysts expected earnings of 27 cents on revenue of $7 billion.
The better-than-expected results should bolster Chairman and Chief Executive James Gorman‘s strategy to reshape the company after the financial crisis. The Australian-born CEO, now in his third year leading Morgan, has preached patience to investors as the firm is in the midst of a multi-year turnaround, focusing on building up the client and advisory businesses, while moving away from areas like proprietary trading. “After a year of significant challenges, Morgan Stanley has reached a pivot point,” Mr. Gorman said in a statement.

Goldman Sachs Unveils Its Bullish 2013 Market Call

goldman sachs

goldman sachs (Photo credit: alyceobvious)


5 Big Investment Strategies

Goldman Sachs‘ equity strategy team led by David Kostin just published its 2013 U.S. Equity Outlook Report

And it’s bullish.

Here’s how Kostin’s team sees the S&P 500 unfolding next year:

Valuation: 12-month target of 1575 reflects 12% potential return
Our 3-month, 6-month, and 12-month forecasts are 1450, 1500, and 1575. We use six valuation approaches including DDM, uncertainty-based P/E multiple, cyclically-adjusted P/E multiple, price/book and ROE relationship.

“S&P 500 sales, which are measured in nominal terms, will rise by 4.4% in 2013 and 4.7% in 2014,” wrote Kostin.  “We forecast net margins will remain static as they have for the past 18 months, hovering in the 8.8%-9.0% band through the end of 2014. Given this environment, S&P 500 EPS will rise from $100 in 2012 to $107 in 2013 and $114 in 2014.”

Kostin first launched that 1,575 price target last month.  But this massive new 50-page report includes much more detail on strategy.

Strategies to capture growth: market, sectors, stocks
(1) Stocks will outperform Treasuries;
(2) Equities will beat credit returns, although not on a risk-adjusted basis;
(3) Cyclical sectors will beat defensive sectors (Materials, Industrials, Information Technology will outperform Consumer Staples, Telecom, and Health Care);
(4) Double Sharpe Ratio stocks offer both high risk-adjusted earnings growth and prospective returns; and
(5) Stocks with high BRICs sales exposure will beat domestic-facing firms.

Here’s what would make Goldman more or less bullish than it is:

The greatest positive catalyst that might lead us to raise our index forecast would be a “grand bargain” addressing the nation’s long-term fiscal imbalances along the lines of the Simpson-Bowles report. It would spark a P/E multiple expansion and a higher target. Downside risks include political discord in US or Europe, the effectiveness of the Fed’s QE policy, higher US Treasury yields, and the sustainability of record high profit margins.

Here are the firm’s 2013 total returns expectations for four big asset classes:


goldman 2013 forecast

Goldman Sachs




Skullcandy Given “Buy” Rating at DA Davidson (SKUL) : Is A Short Squeeze On?


Skullcandy Inc logoDA Davidson reissued their buy rating on shares of Skullcandy (NASDAQ: SKUL) in a research report released on Monday morning.

“2012 Black Friday weekend appeared to be a success, with NRF estimating combined instore and online shopping visits grew 9% year-over-year (y/y) to $247 million, with the average weekend shopper spending 6% ($25) more than they did in 2011. With this backdrop, we tracked headphone promotions across all retail channels looking for signs of headphone category strength and Skullcandy brand positioning. We came away convinced Skullcandy remains a top headphone brand and consumer interest in the category is strong.,” the firm’s analyst wrote.

A number of other firms have also recently commented on SKUL. Analysts at Jefferies Group cut their price target on shares of Skullcandy from $20.00 to $17.00 in a research note to investors on Friday, November 2nd. They now have a buy rating on the stock. Separately, analysts at Raymond James downgraded shares of Skullcandy from a strong-buy rating to a market perform rating in a research note to investors on Thursday, October 18th. Finally, analysts at Morgan Stanley downgraded shares of Skullcandy from an overweight rating to an equal weight rating in a research note to investors on Thursday, September 13th.

Shares of Skullcandy traded up 1.26% during mid-day trading on Monday, hitting $8.0499. Skullcandy has a one year low of $7.70 and a one year high of $17.76. The company has a market cap of $221.7 million and a P/E ratio of 8.34.

Skullcandy Up 7%; Is a Short-Squeeze On?

Skullcandy Inc. (SKUL), maker of fashionable headphones, is up about 7% today to $8.50, as it slowly claws back some of its losses this month.

The stock is down 30% in November after it lowered its full-year earnings outlook, but in the past few days there have been some pretty bullish calls on the stock — analysts at D.A. Davidson & Co. on Monday reiterated their Buy rating and target price of $19, writing:

We believe current valuation (6.9x our 2013 EPS estimate) does not adequately reflect SKUL’s double-digit organic growth and mid-teens operating margin profile.

Despite its November whacking, the stock is a consensus Buy rating at the firms that cover it. (We’ll note here that on Monday TheStreet downgraded it to Sell.)

There could be an additional reason behind the move, however: as of Oct. 31, short interest in the stock was 57% of the float — a huge number and one that suggests today we could be seeing a short squeeze.

Trading Alert SKUL

Nov 28

Skull Candy 56% short

Skullcandy Inc(SKUL:NASDAQ, US)

Above Average
As of 28 Nov 2012 at 11:47 AM EST.

Expand/Contract Level 2 Quote

Market Maker Shares Bid Price Ask Price Shares Market Maker
Nasdaq Execution Services, LLC. 300 8.570 8.580 300 Nasdaq Execution Services, LLC.
UBS Securities LLC 2,000 8.530 8.650 400 UBS Securities LLC
Timber Hill LLC 100 8.520 8.790 100 Timber Hill LLC
Susquehanna Financial Group, LLP 100 8.070 9.180 100 Goldman, Sachs & Co.
Susquehanna Capital Group 100 8.070 9.280 100 Susquehanna Financial Group, LLP
D.A. Davidson & Co. 100 8.030 9.280 100 Susquehanna Capital Group
Goldman, Sachs & Co. 100 7.970 9.720 100 Wilson-Davis & Co., Inc.
Wells Fargo Securities, LLC. 300 7.880

Apple Jumps – Analyst Calls Recent Sell-off ‘Insanely Insane’

English: The logo for Apple Computer, now Appl...

English: The logo for Apple Computer, now Apple Inc.. The design of the logo started in 1977 designed by Rob Janoff with the rainbow color theme used until 1999 when Apple stopped using the rainbow color theme and used a few different color themes for the same design. (Photo credit: Wikipedia)

Nov. 20

The sell-off in Apple’s stock over the past eight weeks has gotten to the point of being ‘insanely insane’ given the depressed valuation

Apple Inc. advanced the most in almost seven months as analysts said a two-month stock slide is unjustified given brisk demand for the iPhone and iPad.

Shares of Cupertino, California-based Apple advanced 5.8% to US$558.45 at 12:20 p.m. in New York, and earlier touched US$559.37 for the largest gain since April.

Apple, which overhauled most of its entire product line-up ahead of the holiday shopping season, had lost about one fourth of its stock market value through Nov. 16, since hitting a record of US$702.10 on Sept. 19. Despite investor concerns about product shortages, stiffening smartphone and tablet competition and management changes, demand for its products remains strong and the stock slide is unfounded, Brian White, an analyst at Topeka Capital Markets, wrote in a research report today.

The sell-off in Apple’s stock over the past eight weeks has gotten to the point of being ‘insanely insane’ given the depressed valuation, new blockbuster products for the holiday season, the attractive long-term growth opportunities that lie ahead and the company’s ability to distribute significant cash flow to investors,” White said. He recommends buying the shares and has a 12-month price estimate of US$1,111.

Katy Huberty, an analyst at Morgan Stanley, also said today that Apple’s shares are a “discount” because of the recent drop. Sales of the iPhone 5 and iPad mini are providing a current boost, while sales in China and other emerging markets such as Brazil will sustain the company’s growth longer term, she said.

Huberty said recent meetings with Apple’s suppliers in Asia point to better-than-expected iPhone and iPad sales. Analysts are predicting 46 million iPhones and 23 million iPads to be sold during the quarter that ends in December, she said. China Mobile Ltd., that country’s largest mobile-phone carrier, also may add the iPhone by the second half of 2013, Huberty said.

Of 62 analysts surveyed by Bloomberg, only two recommend selling the shares. The average 12-month target price is US$766.60.

Tullow Oil update ( Morgan Stanley )

Tullow oil camp, Uganda

Tullow oil camp, Uganda (Photo credit: Conservation Concepts)

Nov. 16

Shares in Tullow Oil (LON:TLW) were higher in early deals after what Morgan Stanley called a re-assuring update.

The broker pointed to upcoming drill results as offering a real and significant near-term kicker to the share price.

In all there are four wells underway, including the eagerly anticipated Zaedyus Deep, which has major implications for Northern Petroleum (LON:NOP) and  Wessex Exploration (LON:WSX), which have a combined 2.5 per cent.

Morgan Stanley reckons the Guiana project is worth an additional 96 pence on the Tullow share price.

Overall value from the current drilling campaign is worth over 15 per cent of the current share price, it added.

Significantly, Tullow is reviewing offers for its Asia business unit, which could also unlock value and has implications as the explorer moves forward.

“While relatively small, we think more significant and greater value disposals are conceivable as management has discussed focussing on assets where it can add significant value via the drill bit,” Morgan Stanley said in a note to clients.

It remains ‘overweight’ on the stock, which it reckons is worth 1,780 pence a share.

At 10am the stock was changing hands for 1,391 pence, up 6 pence on the day.

Earlier, Tullow said its financial performance was in line with City forecasts and it remains on target to deliver average net production of 80,000 to 84,000 barrels of oil equivalent per day (boepd) for the full year.

The group’s interim management statement covering the second half of the year said operational and financial performance has remained strong.

In Ghana, the production capacity of the Jubilee field has been ramped up and is expected to exceed 90,000 bopd (gross) by the end of the year, while in Kenya, the second exploration well in the Lockichar Basin has successfully encountered oil, which has further de-risked the exploration prospec

ts in the basin. Additional exploration drilling and testing results across Tullow’s Kenyan and Ehtiopian assets are expected before the end of the year.

Forecast capital expenditure for 2012 remains in the region of $2.0bn. As of October 31st, net debt is around $0.9bn and unused debt capacity is in the region of $2.2 billion.

“Growing production and cash flow from the Jubilee field continues to strengthen Tullow’s financial base as we look forward to further significant exploration and development programmes in 2013,” the group said.

Coach and Luxury Retail Decline

English: Window of Michael Kors purse shop

English: Window of Michael Kors purse shop (Photo credit: Wikipedia)

 Sept. 12

Coach (COH : NYSE : US$61.48)

Michael Kors Holdings (KORS : NYSE : US$53.32)

Shares of luxury retailers fell after British-based Burberry issued a profit warning for its current fiscal year. It expects profit to come in at the low end of market expectations and management also said that sales have decelerated in recent weeks.

Seeking Alpha notes that while some of Burberry’s struggles have been pegged as “self-afflicted,” the company’s weakening sales in Europe and China could be considered alarming for high-end sellers. On top of the cautious outlook from Burberry, Coach was downgraded at Brean Murray, furthering the downward pressure on shares. The brokerage sees shares as fully valued and believes the company will struggle to meet tough comparative sales number in the coming months.

While it was a tough day for Coach, Morgan Stanley praised the firm for the way it is handling increased competition from Michael Kors. The brokerage said, “We view this similarly to the way Nike (NKE) responded to the Under Armour (UA ) threat.” Pointing to the steps the company has taken to improve its image and strengthen its connection with customers as indicators the company is on the right track. They believe there is room for both Coach and Michael Kors to grow as the luxury retail business continues to expand



The Four Risk Threats To The Economy / Stock Market : David Rosenberg

Printer Mario Draghi

Printer Mario Draghi (Photo credit: Ondrej Kloucek)

Gluskin-Sheff’s bearish economist David Rosenberg took a page from the Book of Revelation today, when identifying the major risks to U.S. growth over the next year.

August 8

Here are what he calls the “Four Horsemen:”

1) Europe:

The situation in Europe remains highly unstable, writes Rosenberg. And the violent market gyration to every “passing comment” by ECB boss Mario Draghi (Like this one last month: “The ECB is ready to do whatever it takes to preserve the euro”) ” says something about the manic mindset of today’s algorithm-dominated fast-money backdrop,” he said.

Speculation that the European Stability Mechanism (which isn’t even up and running yet) will be granted a banking licence and save the eurozone experiment is actually beyond the central bank’s purview, he wrote. In the final analysis it would be a political decision — which ain’t going to happen.

 ”Every German knows what happened in the 1930s and anyone with a keen sense of history knows that Germany is never going to vote for outright debt monetization. What one can reasonably expect at some point is a partial fragmentation of the nonsensical monetary union.”

2) Soaring food prices

More than half the counties (1,584) across 32 U.S. states have been deemed an agricultural disaster as American suffers through its worst drought in 50 years. As a massive global food producer, the U.S. plays a key role in influencing food prices. Corn is expected to top $10 a bushel, but the big question is whether rain will come in time to salvage the soybean crop — which has more far-reaching implications.

A failed soy harvest in the States could spur Asian countries to impose rice export bans like they did in the financial crisis. And as Rosenberg points out, one of the main reasons for the tensions that fuelled the Arab Spring was rampant food inflation.

3) Negative export shock

The eurozone’s recession is deepening and spreading, having an increasingly unfavorable impact on its neighboring economies and trading partners.

That’s why one of the most significant pieces of data last week was the drop in the ISM export orders index from 47.5 to 46.5 to the weakest level since the depths of the downturn in April 2009, Rosenberg says.

4) The proverbial fiscal cliff

More than 40% of companies in a recent Morgan Stanley poll said they were restraining spending now just in anticipation of America’s pending “fiscal cliff” — That’s the expiration of US$600-billion worth of tax cuts and spending programs in late 2012 to early 2013, which threatens to lop off around 3-5 percentage points of GDP if Washington doesn’t act.

“Recessionary pressures are building, and at a time when the pace of U.S. economic activity has precious little cushion.”


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