Stress tests carried out by the Federal Reserve in the U.S. boosted confidence in the banking sector and sent banking stocks sharply higher, but banks are not out of the woods yet, Matthew Czepliewicz, analyst at Collins Stewart, told CNBC.
The tests sounded the all clear for most major U.S. banks. The Fed tested for conditions assuming 13 percent unemploymentand a 50 percent stock market decline.
“The stress tests were challenging enough to be credible without becoming deliberately penal, and as such they are a key step in further restoring confidence in the banking sector,” Czepliewicz said.
“The overall message is that the sector is regaining some momentum. One of the interesting things about the rally that we’ve seen over the past couple days is that the quality names perform quite well,” Czepliewicz explained. “That’s a sign that investors are starting to come back into the sector.”
In a note to clients, Czepliewicz wrote that the outcome of the tests complement the gradual improvement in economic indicators out of the U.S. in improving investor sentiment toward the sector. He cited positive developments in Europe such as the twin injections of liquidity by the European Central Bankand the Greek debt swap agreement as additional factors that supported improved sentiment.
Asked about the market impact of potential downgrades for banks, Czepliewicz said, “Unless we’re talking multiple downgrades, I think the market has pretty much priced that in. And indeed in some cases when the downgrades have actually occurred, again on either side of the Atlantic, banks have actually started to perform better. They rallied a little bit.”
Despite growing confidence, Czepliewicz remains cautious as he looks to the future.
“The banks are not entirely out of the capital woods yet, as they still have to roll forward over the medium term in Basel III,” he said. “It’s not going to be a straight path upwards. We do on fundamentals still see about 20 percent upside in the banking sectors in Europe and the US, but I think any rise will be punctuated with an inevitable temptation to take some profits.”
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Disclosure information was unavailable for Matthew Czepliewicz or his employer.