Goldman Sachs, Morgan Stanley lead US banking rally after stress test

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(Reuters) – US bank stocks outperformed the broad market on Monday, led by Goldman Sachs and Morgan Stanley, after the Federal Reserve said stress test results meant the sector could resume share buybacks for the first time since the downturn caused by the coronavirus.

The Fed said America’s largest banks have enough capital to support more than $ 600 billion in losses due to a short and sharp economic crisis, as well as a longer-lasting moderate slowdown, and would now be allowed pay dividends and repurchase shares on a limited basis.

Earlier this year, the Fed banned banks from repurchasing stocks to help them build capital reserves due to the COVID-19 pandemic.

This was its second banking “stress test” for 2020, the first time the Fed has done two in a year since the start of annual health checks after the global financial crisis of 2007-2009.

Goldman shares rose 7.2% for the last time after surpassing their January high for the first time since the COVID crisis. Morgan Stanley was up 5.9% and trading at its highest level since September 2007.

By comparison, the banking subsector of the S&P 500, which does not include Goldman or Morgan Stanley, rose 3.1%.

The regulator’s move came faster than many investors expected and suggested investors at Morgan Stanley and Goldman Sachs were in line for bigger buyouts than the majority of the industry, according to the Piper Sander analyst. Jeffery Harte.

“Overall, the amount of share buybacks that the Fed’s calculations suggest the big banks will be able to do in the first quarter of 2021 is good news for the group,” Harte said.

As for Goldman Sachs, Harte noted that investors were more concerned about the bank’s dividend outlook during the pandemic.

“This is a pretty positive change from people worried that Goldman could keep their dividend at the option of repurchasing more stocks than most of the industry,” he said.

The Fed’s move came earlier than expected and results were a little better than expected overall, said RJ Grant, head of trading at Keefe, Bruyette & Woods.

“In general, people thought the Fed was going to keep the restrictions in place for another quarter or two,” said Grant, who also suggested that investors favor Morgan Stanley and Goldman because of relatively cheap valuations.

According to Refinitiv, Goldman’s earnings futures multiple of 9.9, which compares its trading price to analysts’ expectations for earnings per share for the next 12 months, is well below the industry median of 12.9.

Morgan Stanley’s multiple of 12.3 is also below the median.

In the sector index JPMorgan Chase led the winners, up 4.8% while Citigroup climbed 3.7% and Bank of America by 4.0%.

Meanwhile, the S&P 500 fell 0.6% as investors fled risk after a new strain of coronavirus emerged in the UK, leading several countries to close their borders to Britain within a few just days before the UK leaves the EU.

Additional reporting by David Henry. Editing by Mark Potter

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