The Federal Reserve recently released annual stress testing results for 23 of the largest banks with a presence in the U.S. During this exercise, the Fed puts banks through a hypothetical economic scenario to ensure banks can absorb the shock from a severe recession and still manage to lend to families, individuals, and businesses during a downturn. In this year's severely adverse scenario, over a nine-quarter period, the Fed had unemployment rising 4% and peaking at 10.75%, gross domestic product dropping 4%, and equity prices falling 55%.
All banks passed easily, maintaining strong capital levels, but some were able to make a profit during the nine-quarter stress test time frame, while the majority of banks reported losses. Now, this doesn't necessarily mean these banks are the best bank stocks, because the Fed's hypothetical scenario is nowhere close to happening, and the earnings power of some the banks mentioned here pales in comparison to others. But if you are looking to get some exposure to the banking sector and want the safest picks, then these bank stocks may be for you.
Bank of New York Mellon (NYSE: BK) fared particularly well during the Fed's hypothetical downturn. Its regulatory capital ratios didn't dip too much, and during the nine-quarter stress period, the bank managed to generate $6.5 billion in net income before taxes. Keep in mind that this doesn't take into account $3 billion in losses from other comprehensive income (OCI), actual losses on certain investments and transactions, and accumulated other comprehensive income (AOCI), unrealized losses on certain investments and transactions. But even if you were to net those against net income before taxes, Bank of New York Mellon still would have the highest profits following the stress test.
For further details see:
3 Banks That Should Outperform During a Severe Recession