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Downgrading Two of Four 'Too Big to Fail' Banks

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On March 7, the Federal Reserve announced its results of mandated stress tests for the 18 largest bank holding companies. Periodic stress tests are a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Reserve's implementing regulations. I am not going to summarize the results of these stress tests except to say that the four "too big to fail" money center banks passed their tests.

Today I am providing additional stress measures for these major money center banks based upon data from www.ValuEngine.com, weekly charts, and my proprietary models and from stock specific data available from the Federal Deposit Insurance Corp. (FDIC) Quarterly Banking Profile for the Fourth Quarter of 2012.

The last time I profiled the four "too big to fail" was on Feb. 6, in "The 'Too Big to Fail' Banks Remain Buy Rated Post-Earnings." The biggest change since then is that two of the four have been downgraded to hold from buy according to ValuEngine, which implies that additional stresses are evident based upon our measures.

Overall we begin the week under a ValuEngine Valuation Warning with 65.5 percent of all stocks overvalued and with the finance sector 18.6 percent overvalued.

Bank of America ($12.07 vs. $11.88 on Feb. 6) remains buy rated with the stock 6.9 percent undervalued with a one-year price target at $12.81. Bank of America opened Friday at a new multi-year high at $12.44, a level not seen since May 2011. The stock has gained 49.8 percent over the last twelve months with a reasonable twelve month forward price-to-earnings ratio (P/E) at 11.42.

The stock has a neutral weekly chart profile with declining momentum with the stock above its five-week modified moving average (MMA) at $11.56 and the 200-day simple moving average (SMA) at $11.73. My semiannual value level lags at $9.01 with a monthly pivot at $11.54 and annual risky level at $17.07.

(Read More: Bank of America Was Actually More Pessimistic Than The Fed)

FDIC data shows that Bank of America increased its total assets by 16.6 percent to $1.69 trillion in Q4 sequentially. The bank has an asset to risk based capital ratio of 9.99 percent up from 9.69 percent in Q3, which is a sign of increased stress as risk based capital is supporting assets increasing at a faster pace making this "too big to fail" bank even bigger.

Citigroup ($46.68 vs. $42.92 on Feb. 6) remains buy rated with the stock 27.3 percent undervalued with a one-year price target at $50.73. Citi traded to a new multi-year high at $46.70 on Friday, a level not seen since April 2011. The stock has gained 37.3 percent over the last twelve months with a reasonable twelve month forward P/E ratio at 9.81.

Citi has a positive but overbought weekly chart profile with its five-week MMA at $42.90 and the 200-day SMA at $37.21. My annual value level lags at $33.19 with a monthly pivot at $45.30 and quarterly risky level at $56.11.

FDIC data shows that Citi decreased its total assets by 3.6 percent to $1.32 trillion in Q4 sequentially moving the bank to be the smallest of the big four. The bank has an asset to risk based capital ratio of 9.68 percent down from 9.83 percent in Q3, which is a sign of deceased stress as risk based capital is supporting a lower base of assets so this "too big to fail" has become slightly smaller.

JPMorgan Chase ($50.20 vs. $48.79 on Feb. 6) has been downgraded to hold from buy with the stock 19.6 percent overvalued with a one-year price target at $52.26. JPM traded to a new multi-year high at $50.86 last Thursday vs. the May 2007 high at $53.25. The stock has gained 24.1 percent over the last twelve months with a reasonable twelve month forward P/E ratio at 9.23.

JPMorgan Chase has a positive but overbought weekly chart profile with its five-week MMA at $47.97 and the 200-day SMA at $40.13. My annual value levels are $44.04 and $42.87 with semiannual and monthly pivots at $46.84 and $49.88 and a weekly risky level at $51.02.

(Read More: Banks Rush to Redraft Pay Deals)

FDIC data shows that JPMorgan Chase increased its total assets by 9.7 percent to $2.03 trillion in Q4 sequentially, which is 14.0 percent of the total assets in the banking system, much too big a share in my judgment. No single financial institution should have control of more that 10.0 percent of all assets among the 7,083 FDIC-insured financial institutions. JPMorgan Chase has an asset to risk based capital ratio of 12.53 percent unchanged from 12.51 percent in Q3. This is another ratio that should be no larger than 10.0 percent in my judgment. JPMorgan Chase is thus a "too big to fail" bank that's dangerously too big in my opinion.

Wells Fargo ($36.50 vs. $34.85 on Feb. 6) has been downgraded to hold from buy with the stock 8.2 percent overvalued with a one-year price target at $38.14. Wells Fargo traded to a new multi-year high at $36.62 on Friday a level not seen since October 2008. The stock has gained 16.2 percent over the last twelve months with a reasonable twelve month forward P/E ratio at 10.13.

The stock has a positive but overbought weekly chart profile with its five-week MMA at $35.34 and the 200-day SMA at $29.43. My annual value levels are $34.17 and $32.82 with a monthly pivot at $35.06 with no risky level versus the September 2008 high at $44.67.

FDIC data shows that Wells Fargo increased its total assets by 9.0% to $1.33 trillion in Q4, sequentially moving up to being the third largest of the big four banks. WFC has an asset to risk based capital ratio of 10.15 percent unchanged from 10.18 percent in Q3. Wells Fargo is another "too big to fail" bank that's even bigger.

Wells Fargo has the largest exposure to construction & development loans (C&D) at $17.28 billion. While this is nowhere near an overexposure versus risk based capital, it represents 8.5 percent of the total C&D loans in the banking system.

By TheStreet.com Contributor Richard Suttmeier

Additional News: Goldman Leads Decline as Wall Street Commodity Revenues Plummet

Additional Views: Banks and Fed's Stress Test Models Far Apart

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Disclosures:

At the time of publication, Richard Suttmeier had no positions in the stocks mentioned.

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Disclaimer

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