Shares of big lenders including Fifth Third and SunTrust jumped Thursday amid cautious optimism about new details of the government's effort to support the banking system.
The Treasury Department released details of its Capital Assistance Program, or CAP, and the so-called stress test for the nation's largest banks on Wednesday.
The economic assumptions embedded in the stress test were less dire than some analysts expected, while the price at which the government may end up owning common equity in some banks is higher than levels at which many of the companies' shares have been trading recently.
The Treasury also defined a clearer exit strategy in cases where the government may become a large shareholder in banks. That eased concern about the full nationalization of some of the large lenders in the U.S.
"Nationalization of selected banks is taken off the table, in our view," Gerard Cassidy and his bank analyst colleagues at RBC Capital Markets, wrote in a note to investors on Thursday.
The combination of the stress test and the ability of banks to raise common equity capital with help from the government "while not perfect, does move the search for a solution to this banking crisis in the right direction," the analysts added. "Ultimately, this should stabilize bank stocks, and fundamentals will eventually drive valuations again when these changes are digested."
Fifth Third jumped 26% to $2.45, while SunTrust surged 26% to $13.79 in afternoon trading.
Bank of America gained 11% to $5.75, Wells Fargo rose 11% to $14.97 and JPMorgan Chase (JPM) rallied 9% to $23.75.
Capital One Financial and U.S. Bancorp jumped more than 15%.
The Treasury said Wednesday that it will use a baseline economic forecast and a gloomier outlook to gauge whether banks have enough capital to absorb higher losses and keep lending in coming years.
The baseline scenario assumes a GDP decline of 2% in 2009 and a GDP increase of 2.1% in 2010. The more adverse scenario has GDP falling 3.3% in 2009 and rising 0.5% in 2010.
The baseline scenario assumes unemployment will be 8.4% in 2009 and 8.8% in 2010. The adverse scenario assumes 8.9% in 2010 and 10.3% next year.
The baseline scenario assumes house prices fall 14% this year and 4% in 2010. The adverse scenario assumes declines of 22% and 7% respectively.
The "stress test uses economic assumptions that are not onerous, allowing healthier banks to avoid taking additional government capital," RBC's Cassidy said.
However, Cassidy and others said this may only provide temporary relief because the test may be too lenient on other banks.
"Our initial expectation is that this will not be the last stress-test we run nor the last capital plan," Joshua Rosner, managing director at research firm Graham Fisher & Co., said. "This CAP plan will, like the other plans before, not resolve the problems with troubled banks. Instead, it will result in ultimately larger losses, larger Treasury issuance, larger deficits and several more weak and anticompetitive banks."
Cassidy reckons more capital injections may be needed after the current government plan.