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Fed's Stress Test Results Can't Be Trusted: Strategist

Despite the rally in U.S. financial stocks following the results of the Federal Reserve's annual bank stress test, which showed majority of the banks had sufficient capital buffers, one analyst is still skeptical about the health of the sector.

United States Federal Reserve
Tetra Images | Getty Images
United States Federal Reserve

"I think a lot of banks are still overstating assets and they haven't recognized problem loans, to the extent that they should have done and it's very difficult to trust numbers," Peter Elston, Asia Strategist at Aberdeen Asset Management told CNBC on Wednesday.

Elston believes many non-performing loans are still not being classified as such.

U.S. banks staged a strong rally overnight after the Fed's announcement that 15 out of 19 major American banks have enough capital to survive another financial crisis. JP Morgan, in particular, shot up as much as 7 percent, as it released its glowing report card and announced a 20 percent dividend hike as well as a $12 billion stock buy-back. That helped lift the Dow past the 13,000 level, the second time it's closed above that mark this year.

"All this stress test really does is it probably makes people slightly less skeptical than they were before and you get a bit of a rally," Elston added. "(But) The market doesn't trust the numbers," he said.

Although the dividend announcements by some banks were cheered by investors, Elston says banks were still facing a difficult situation.

"This is where you're really caught between a rock and a hard place, if you don't pay dividends you find it hard to raise capital, and if you do pay dividends you weaken your capital base and make it less likely you'll survive another downturn," he said.

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