Will Bank Stress Tests Crush Financial Stocks?

One prominent bank analyst believes that the latest round of bank (NYSEARCA:KBE) stress tests could cause more harm than good. The Dodd-Frank Regulations mandate that the Federal Government run annual test scenarios under which the largest banks must survive 13 percent unemployment and an additional 21 percent drop in real estate prices. The government feels that banks must be able to survive the dire conditions that mimic the 2008 economic crisis in order to prove stable financial positions.

CNBC quoted Dick Bove, vice president of equity research at Rochdale Securities, who said, “”The banks are back, the banks are in good shape, the banks are ready and able to assist the economy. Then along comes this annual abortion of a stress test. You’re going to see that they’re going to have to stop lending money, they’re going to have to dump loans, they’re going to have to increase cash positions.”

Bove says that by increasing cash reserves to offset loan losses, bank profits will go down and they will therefore have to reduce lending. Bove has sent contradictory messages however, saying at one time to “buy bank stocks hand over fist,” while simultaneously warning about the demise of the banking industry due to overregulation. The analyst also recommended getting out of stock completely several months ago.

However, it seems that Bove’s concerns are not echoed across the banking industry. Goldman Sachs (NYSE:GS) told CNBC that it felt banks were in a good position and based on a mock stress test run by the company, all of the banks will pass. One Goldman Sachs analyst said, “We believe most banks are well positioned for the 2012 Fed stress test. Reduced leverage, higher quality assets (lower risk, limited/no prop trading) and higher capital levels relative to prior exams should help banks withstand the stress of the Fed’s exam,” per CNBC.

Banks to watch in the wake of stress test rhetoric include: Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS), and Goldman Sachs (NYSE:GS).