Raising Capital After Stress Tests [WSJ]
With the government's stress tests under their belts, the nation's 19 biggest banks likely will start racing to raise required capital or repay the funds they received under the Troubled Asset Relief Program.
Among companies told they need at least $65 billion of fresh capital, the lucky ones will be able to tap the public markets or convert preferred shares into common equity.
Those that can't will find themselves with few options. They will either need to tap the government's coffers for additional capital or sell valuable assets.
Few analysts see an immediate rush into mergers and acquisitions, particularly since buyers remain scarce. Although rising unemployment will likely continue taking a big bite out of bank balance sheets this year, there is a growing sense that the banking system will be able to absorb those losses. Still, a run on deposits or sudden liquidity drain could prompt the government to force consolidation.
Here is a company-by-company breakdown of the expected results for the 19 banks that underwent a government stress test, as well as indications of where they will go from here:
American Express Co.
The big card company won't need additional capital, but it is still dealing with a ballooning amount of delinquencies and defaults on its credit cards. At the same time, American Express is grappling with a steep decline in spending among its affluent customer base.
To counter these trends, New York-based American Express is juicing up its deposit base by pitching certificates of deposits that are sold through brokers and its Web site. The company is also putting some additional focus on its charge cards, which are less risky than revolving credit cards because they require customers to pay off the balance each month.
The company said last month that it hoped to repay $3.4 billion in TARP funds after the stress tests were completed.
Bank of America Corp.
Bank of America's gap of $34 billion is the largest of the 19 stress-tested banks. It expects to fill that hole without any additional government investment or ownership, meaning the U.S. would not become a big shareholder via conversion of an existing $45 billion TARP investment into common stock or mandatory convertible preferred stock.
Asset sales, which could include private bank First Republic, asset manager Columbia Management and a partial stake in China Construction Bank, are expected to raise about $10 billion, said a person familiar with the situation. It is also possible the bank could quickly look to raise capital via a new common stock offering, this person said. Yet another option is to convert private preferred shares into common stock.
--Dan Fitzpatrick
Bank of New York Mellon Corp.
The New York custody bank won't need to raise any new capital. Bank of New York Mellon on Tuesday issued $1.5 billion in debt not guaranteed by the U.S. government, making it the latest financial institution to show that it doesn't need to rely on Washington's assistance. The bank said it will use the proceeds to repay $3 billion in TARP funds.
--Marshall Eckblad
BB&T Corp.
BB&T isn't expected to need more capital, but the Winston-Salem, N.C., regional bank is widely expected to cut its quarterly dividend of 47 cents to help cushion it against future losses. A reduction in the dividend could also help BB&T re-pay the $3.1 billion in TARP funds that the company received last year.
BB&T had a tangible common quity ratio of 7.1% against risk-weighted assets, as of March 31 – nearly double the emerging requirement from regulators.
--Marshall Eckblad
Capital One Financial Corp.
Capital One Financial won't need new capital, which is a surprise to some who have seen the economic slump take a big bite out of the company's profits.
Capital One has transformed itself from a credit card lending into a bank to get deposits and more diverse earnings. The company has long said those unsecured loans are safer than real-estate loans because it is able to price in the risk of default into the interest rates charged rather than having to rely on the value of the collateral.
One big help for the company is that it has built reserve aggressively. It set aside $1 billion for future loan losses in the fourth quarter and $124 million in the first quarter, but on March 31, its tangible common equity stood at a robust 4.8% and its Tier 1 risk-based capital ratio was 11.4%. The loss ratio for its credit card portfolio have exceeded the unemployment rate, and are expected to shortly exceed 10%.
--Matthias Rieker
Citigroup Inc.
Citigroup will need raise about $5 billion in new capital, after successfully lobbying the Fed to give the bank credit for some pending capital-generating transactions. Citigroup's main plan to cover the $5 billion shortfall is an expansion of its previously planned conversion preferred shares into common stock. That could further erode the value of Citigroup's existing stock, but won't give the U.S. government a bigger stake in the beleaguered company.
One upside to the plan is that it will save Citigroup some cash. That's because the company likely will suspend dividend payments on more of its preferred securities in order to convince the holders of those securities to go along with the conversion.
--David Enrich
Fifth Third Bancorp
Cincinnati-based Fifth Third Bancorp is widely expected to need more capital, although the exact amount couldn't be determined ahead of the stress test results. Like other regional banks that expanded outside its home turf when the times are good, Fifth Third is now being hit hard by its move into Florida markets. The bank is also exposed to souring loans in Michigan.
Fifth Third will likely have few places to turn for fresh capital. It has already sold the majority stake in one of its most prized assets, a unit that processes credit-and-debit card transactions on behalf of merchants, to a private-equity firm. The bank took $3.4 billion in TARP funds and will likely need to convert some of the government's investment into common equity.
--Marshall Eckblad
GMAC LLC
The financing arm of General Motors Corp. will need to raise as much as $11.5 billion of additional capital, representing roughly half of GMAC's total equity as of Dec. 31. A GMAC spokeswoman declined to comment.
Filling this large capital hole will be a challenge for the strapped lender, which faces hostile capital markets and a pile-up of losses from souring auto loans and mortgages.
Still, the company is in a unique position because of its government-sanctioned status as the lender to GM and Chrysler LLC dealers and consumers. The government said it would provide more federal funds to GMAC after the company last week assumed the mantle of lender for Chrysler vehicles as the auto maker restructures in bankruptcy court. GMAC, which recently converted to a bank holding company, received $5 billion from TARP.
--Aparajita Saha-Bubna
Goldman Sachs Group Inc.
Wall Street behemoth Goldman Sachs Group won't need to raise any capital following the stress tests. The firm, which recently raised more than $5 billion in common equity, doesn't need to raise capital and has made it clear it wants the government, and the public scrutiny that came with it, out of its operations. It is expected to repay the $10 billion in TARP as soon as it is permitted.
-- Susanne Craig
J.P. Morgan Chase & Co.
Widely viewed as one of the nation's strongest banks, there has been little surprise that J.P. Morgan Chase won't be required to boost its capital cushion. Chairman and Chief Executive Officer James Dimon has been chomping at the bit to repay $25 billion in TARP funds, and the bank is likely to start that process as soon as possible. In February, the bank slashed its dividend by 87% to a nickel a share, a move that is expected to save an extra $5 billion of capital a year.
Still, J.P. Morgan isn't immune to the troubles that are expected to bedevil the banking industry for the rest of the year. Its consumer businesses have been battered by rising delinquencies and defaults. Mr. Dimon has also already acknowledged that the bank's massive credit card business won't make any money this year.
--Robin Sidel
KeyCorp
KeyCorp has been mum about whether the stress tests point to a need for capital, but the Cleveland-based bank is widely expected by analysts and investors to face a capital deficiency. KeyCorp was an aggressive real-estate lender during the housing boom, and ventured far outside its traditional Midwestern footprint, a common recipe for trouble for regional banks.
If KeyCorp needs to find new capital, it could turn to its $658 million in privately held preferred shares, which could be converted into common stock. Key also theoretically could try to sell some of its peripheral businesses, including its asset-management or capital markets arms. Aside from that, the company may have to consider converting some of the government's $2.5 billion TARP investment into common stock.
--David Enrich
MetLife Inc.
MetLife, the largest U.S. life insurer, is the only insurance company included in the stress test, and was expected to slide through without any additional call for capital. MetLife raised $2.3 billion through a common-stock offering in October. The company said in April that it will not to participate in the Treasury's Capital Purchase Program, if it is opened to life insurers.
--Lavonne Kuykendall
Morgan Stanley
It is expected that Morgan Stanley will have to raise an additional $1.5 billion, a relatively small sum compared to commercial banks like Bank of America and Citigroup.
The Wall Street firm isn't likely to have much trouble raising the money. Analysts have speculated that given how eager rival Goldman is to pay back its $10 billion in TARP funds, Morgan Stanley will likely try and pay it back soon so as not to give Goldman a competitive advantage.
--Susanne Craig
PNC Financial Services Group Inc.
PNC Financial Services Group needs less than $1 billion, according to a person familiar with the situation, and the Pittsburgh-based bank expects to cover the shortfall with retained earnings or small adjustments to its capital. Its gap is among the smallest of any bank identified by regulators as needing more equity. It does not expect to sell any assets to deal with the gap, this person said, but it may raise capital to pay back TARP quickly.
PNC, the nation's fifth-largest U.S. bank as measured by assets, has largely avoided the problems afflicting other regional banks during this crisis. Late in 2008, it received $7.6 billion in government funding to buy National City after regulators forced the Cleveland bank to sell itself. Unlike other bank executives who got final word on the test results earlier in the week, PNC officials didn't know until Thursday morning what the number would be and had argued to regulators the gap should be zero.
--Dan Fitzpatrick
Regions Financial Corp.
Regions Financial will be required to get capital, but it is unclear exactly how much, according to a person familiar with the matter. A Regions spokesman declined to comment.
The Birmingham, Ala.-based lender got in trouble by gorging on construction and other commercial real-estate loans in the southeastern U.S., especially along the Gulf Coast.
Raising capital could be tough for Regions. The bank, which received $3.5 billion in taxpayer capital last year, doesn't have any privately held preferred shares outstanding, which would have offered a relatively painless way to raise capital. Instead, Regions might be forced to convert some of its government stake into common stock, which could leave Washington owning a large chunk of the company.
--David Enrich
State Street Corp.
State Street does not need to boost its capital levels as a result of the government's recently concluded stress tests, according to people familiar with the matter.
A report in Wednesday's Wall Street Journal said the bank was among those that needed to improve its capital. The firm accepted $2 billion in TARP support back in October.
Of notable concern for State Street is a complicated off-balance-sheet entity known as a "conduit" that State Street will likely bring onto its balance sheet at the end of this year. Market participants say State Street, unlike some troubled regional banks, could likely sell new common shares to fill any capital hole, a sign that investors are once again warming to the firm. Paying off Uncle Sam, however, might take awhile, depending on how much capital the firm is told to raise.
--Marshall Eckblad
SunTrust Banks Inc.
SunTrust Banks, a bank heavily exposed to problems in the Southeast, is expected to emerge from the test with a shortfall in the low billions. The bank may have several options to fill that hole, including converting some of its $4.9 billion in TARP funds into common shares. Atlanta-based SunTrust could also bolster capital by shrinking its trading assets or securities portfolio.
--Dan Fitzpatrick
U.S. Bancorp
The large Minneapolis-based lender isn't expected to need fresh capital due to its conservative underwriting standards that have kept it fairly well-protected from the industry's chaos. CEO Richard Davis says U.S. Bancorp wants to return the $6.6 billion it received from TARP.
Unlike the nation's other large banks, U.S. Bancorp has steered clear of big acquisitions that have taken place in the past year. That means the company could face pressure from the government to swallow another lender that is reeling from the recession.
--Robin Sidel
Wells Fargo & Co.
Wells Fargo, a loud critic of the stress tests, emerged with the second-highest shortfall of any bank. But it was able to lower the figure from $15 to roughly $13 billion, according to a person familiar with the negotiations. The San Francisco bank believes it can resolve the gap in a number of ways, this person said, including higher-than-expected earnings.
Other options most likely include asset sales, a share offering or convincing holders of about $9.5 billion in private preferred shares to trade for common. Warren Buffett, already a big Wells shareholder, could be a buyer of more equity in the bank. Another alternative is for Wells to tap the $25 billion in federal aid it received last year, exchanging the government's preferred shares to common or mandatory convertible preferred stock.
The bank is the nation's fourth-largest bank by assets but it remains heavily exposed to troubled mortgages and commercial real estate loans inherited from its recent purchase of Wachovia Corp. Wells Chairman Richard Kovacevich disapproved of the plan last fall to inject federal capital into the largest U.S. banks and he called the stress test exercise "asinine." |
