Publicly traded bank holding companies, by virtue of their listings, have high investment visibility and are often used as benchmarks for the health of the banking system. However, one key missing ingredient for investors is understanding how existing stresses in the economy are likely to impact a bank’s health on a forward looking basis. Given each banks’ loan portfolio and the likely deterioration to that portfolio, combined with the expected contribution of profits or losses, Invictus’ proprietary stress testing methodology fills in that missing ingredient.

By examining the projected impact of stresses to a bank’s portfolio, Invictus’ stress testing methodology identifies the expected growth or decline to each bank’s risk-based Tier 1 capital over a two year horizon.

    The graphs below portray the expected impact of stress to single bank holding companies. The graph on the left shows 366 banks
    traded on the NASDAQ & NYSE/AMEX exchanges; the graph on the right shows 625 banks traded on the OTCBB & Pink Sheets.

  

Understanding these graphs:

• Each bank within a publicly-traded single bank holding company is plotted along the x- axis.
• The zero baseline establishes the point from which each bank is stressed, in this case each bank’s currently reported risk-based Tier 1 capital.
• Using publicly available data, each bank’s loan portfolio undergoes a uniform two year stress test.
• The relative impact on capital, inclusive of the earnings contribution from the remaining performing loans, is plotted along the y-axis as a percentage of capital increase or erosion resulting from the stress test.
• Positive figures indicate the overall elevation of capital ratios due to surplus earnings that offset any post-stress capital declines.
• The black dots on the graph represent those banks that fall below an 8% risk-based post stress Tier 1 capital ratio.
• All banks are presented in a randomized order.

The post stress information is critical in the valuation of banks both on an absolute basis and relative to each other. When incorporated into existing analytical methodologies, by inserting forward-looking projected capital* in place of currently reported capital, a very different picture emerges than can be obtained using traditional analyses that rely only on currently reported data. Metrics such as return on capital, earnings, P/E ratios, dividends, competitive positioning, and liability structure all change dramatically for banks when measured on a post-stress basis.

In this forward-looking analysis, the Invictus stress test methodology is not assuming a worst case economic scenario, but rather assumes that the existing stresses impacting banks will not significantly improve or deteriorate over the two-year stress horizon.

In the near future, Invictus is planning to offer an Invictus Approval Rating™ (IAR) product for publicly traded banks that will have two components:

1. Bank Sustainability
2. Relative Impact of Stress for Individual Banks

* “capital” in this analysis refers to risk-based Tier 1 capital