The banking industry has shown it can weather economic downturns relative to the financial crisis years – even under the toughest stress testing scenarios. But how prepared is it to withstand a lingering recession escalated by the COVID-19 pandemic? To find out, we ran a severe adverse Dodd-Frank Act Stress Test (DFAST) to explore the impact a deep recession and two years of losses might have on banks’ capital levels, buybacks, dividend payouts, and valuations.
Gerard Cassidy authored the research report “U.S. Banks Feel the Burn 2020”. For more information about the full report or to access an Interactive Model that allows you to run your own testing scenario and input your own base-case assumptions, please contact your RBC sales representative.
We’ve shared some key insights from the results of our research findings below.
Report Key Takeaways:
Banks are well-positioned to handle “the burn”
Our research shows that banks would take a hard hit from a severely adverse scenario--but appear to be in a good position to stand up to a solid economic “one-two punch” accelerated by the pandemic.
Assuming either bank-specific loss scenarios or a 5.7% average cumulative loss over the next two years, banks’ capital strength would decline. However, most can still maintain strong liquidity levels and meet common and preferred dividend requirements.
Valuations hold up under a sharp market sell off
Banks’ book and tangible value will also hold up well during an assumed sharp market sell off and extremely stressed conditions.
Our analysis of “burndown” values reveals that banks would trade at 82% of book and 115% of tangible book value in these situations.
Banks sail through an extreme stress testing scenario
Overall, we believe that banks are in a solid position to handle a prolonged economic spiral accelerated by the COVID-19 pandemic.
Although they will clearly experience losses driven by declines in liquidity, we don’t expect it to impact their credit or balance sheet strength significantly.
Gerard Cassidy, Jon Arfstrom, and Steven Duong authored the U.S. Banks: Feel the Burn Report. For more information about the full report, please contact your RBC sales representative.
Published March 26, 2020
Gerard Cassidy
Managing Director, Head of U.S. Bank Strategy
RBC Capital Markets, LLC
Gerard is responsible for providing bank and regional economic research to the firm's clients. Prior to joining our research department in 1988, he was employed by Unum Corporation as a senior bank analyst. He began his professional career with Gulf+Western Industries as a merger and acquisition analyst. Gerard is president and a member of the board of directors of the BancAnalysts Association of Boston, Inc. He is also a former member of the board of directors and secretary of the New York Bank and Financial Analyst's Association. Gerard is the creator of the Texas Ratio, a ratio used by investors to determine whether a bank could be insolvent.
Jon Arfstrom
Equity Analyst
RBC Capital Markets, LLC
Jon brings over 20 years of experience as a research analyst to his coverage of financial services, including banks and consumer finance companies. Prior to joining RBC Capital Markets in 1999, he was a financial services research analyst at US Bancorp Piper Jaffray in Minneapolis. He was also a treasury manager for Graco, Inc. and a CPA for KPMG LLP, specializing in financial services companies.
Steven Duong
Equity Analyst
RBC Capital Markets, LLC
Steven Duong joined RBC Capital Markets research division in 2009 after a prior tenure with RBC’s investment banking team from 2000-2003. Between 2003-2007, Steven worked at S&P Global Market Intelligence (formerly SNL Financial LC) as the head of their online analytics platform and co-head of their Financial Institutions Group research division. Prior to joining RBC research in 2009, Steven was a partner in a real estate brokerage company in Panama. He currently covers the U.S. SMID-cap banking sector at RBC. Steven graduated magna cum laude from Rutgers University with a BA in political science and economics.
