Summary
- In contrast to the previous year, Goldman Sachs could surprise the market positively with its 2019 Dodd-Frank Act Stress Tests (DFAST) and Comprehensive Capital Analysis and Review (CCAR).
- The 2019 DFAST severely adverse scenario features a lower decline in asset prices compared to the 2018 DFAST, and that bodes very well for investment banks.
- Goldman Sachs has improved its capital position both in terms of the CET1 ratio and the SLR (supplementary leverage ratio) since the 2018 CCAR.
- Finally, GS has the lowest dividend payout ratio among the big-6 US banks.
- We are still cautious on Goldman Sachs in the longer-term, but the 2019 CCAR release could become a trigger for a short-term rally in the stock.
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The Fed will publish the 2019 Dodd-Frank Act supervisory stress tests (DFAST) on June 21, and the results from the related Comprehensive Capital Analysis and Review (CCAR) will be released on June 27.
As a reminder, last year the Fed issued a conditional non-objection to the capital distributions plans of Goldman Sachs (GS) as its SLRs (supplementary leverage ratio) were barely above the 3% regulatory minimum under the severely adverse scenario. As a result, the bank had to limit its capital returns to shareholders.
However, we believe that this year GS could surprise the market positively with its CCAR release.
Removal of Fed’s quality objection
First of all, it is worth mentioning that the Fed eliminated the so-called qualitative objection, which allowed it to object to capital plans based on qualitative grounds, for firms other than those recently subject to the qualitative objection (Barclays US LLC, Credit Suisse Holdings, DB USA Corporation, TD Group US Holdings LLC, and UBS Americas Holdings). Hence, we believe that conditional non-objections will be also unlikely in the 2019 CCAR.
