- American Express and Capital One passed the Fed's 2025 stress test, with Capital One seeing a positive impact on capital returns.
- Capital One's stress capital buffer dropped, while American Express’s remained unchanged, signaling a positive outlook for capital returns.
- A new wave of value and momentum stocks could be setting up for major moves—and Tim Melvin will name them live this Wednesday. Secure access here.
Bank of America Securities analyst Mihir Bhatia noted on Monday that American Express Co. AXP and Capital One Financial Corp. COF both passed the Federal Reserve Board’s 2025 Dodd-Frank Supervisory Stress Test (DFAST), the results of which were released after market close on Friday.
The Federal Reserve’s annual stress test evaluates if banks can withstand severe economic downturns, like a recession, and still operate normally.
It checks their financial strength by estimating potential losses, revenues, and expenses under hypothetical bad conditions. The test results help the Fed set a Stress Capital Buffer (SCB), a key requirement that ensures banks have enough capital to absorb losses and continue lending.
Also Read: Big Banks Pass Fed’s 2025 Stress Test With Ease—But Some Say It Was Too Easy
While not seeing the recent stress test results as a major catalyst, Bhatia views them as an “incremental positive” for Capital One. This is particularly relevant given Bhatia’s capital return bull thesis for the financial giant.
Bhatia notes that while the successful stress test outcome for Capital One was largely expected, it nonetheless “clears a bar.” Crucially, the lower SCB for Capital One is highlighted as a significant positive for the company’s prospective capital returns to shareholders.
Bhatia reiterated Buy ratings on both American Express and Capital One following the stress test results.
The analyst said Capital One’s SCB was down to 4.5% from 5.5% last year, and American Express’s was unchanged at 2.5% (the minimum).
Capital One’s results did not surprise him, given a less severe downturn in the 2025 scenario compared to 2024. Bhatia said better results were driven by better revenue performance in the 2025 test.
According to the analyst, under the severely adverse scenario, which assumes a 10% unemployment rate, American Express still produces positive earnings before taxes over the stress test period. Capital One would have negative earnings, he noted.
Bhatia noted that the Federal Reserve estimates that American Express and Capital One’s company-wide loss rates would be 11.8% and 16.4%, respectively, above last year’s results of 12.3% and 16.5%.
As per the analyst, the pure-play card issuers have first-quarter 2025 CET1 (Common equity tier 1) ratios +350bps above their minimum regulatory requirements and strong capital positions.
It’s important to note that these stress test results do not include Discover Financial Services. Capital One recently completed its acquisition of Discover Financial Services on May 18, 2025.
The company is in the process of completing internal stress tests to form its view of its medium-term capital targets, previously around 11%, Bhatia said.
With the closing of this acquisition, Capital One is no longer required to obtain prior approval for its capital choices. The company expects to complete internal stress testing in the second half of 2025, after which Bhatia anticipates a ramp-up in capital returns.
He suggests that Capital One will likely operate with a buffer to its new target during the integration process, implying elevated capital returns for some time rather than a single substantial payout.
For American Express (AXP), currently priced at $317.9, Bhatia forecasts a target price of $353. This projection is based on a 20.5x price-to-earnings (PE) multiple applied to the company’s anticipated 2026 earnings per share (EPS).
Bhatia justifies this multiple by stating it aligns with the broader market’s valuation and is further supported by AXP’s historical valuation trends and a growing confidence in the stability and resilience of its earnings.
Regarding Capital One (COF), which is currently trading at $211.01, Bhatia has set a price forecast of $233. This forecast is calculated using a 10x PE multiple applied to its 2027 EPS forecast, with the valuation then discounted back by one year.
While acknowledging that this 10x PE multiple sits at the higher end of Capital One’s historical range (which typically fluctuates between 7x and 12x), Bhatia believes it is appropriate.
The justification for this higher multiple stems from anticipated synergy realization from recent acquisitions, an optimistic outlook on credit quality, and the strength of Capital One’s cardholder base.
Price Actions: AXP stock is up 0.37% at $318.48 at last check Monday. COF is up 1.15%.
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