Fed Stress Test Results May Show 10 U.S. Banks Need Capital The Federal Reserve plans to deliver results of stress tests on U.S. banks to executives today that may show about 10 companies need additional capital to weather a deeper recession, people familiar with the matter said.
Banks are formulating plans for filling their capital requirements, much of which would likely come from conversions of preferred shares, the people said. Many of the 19 lenders under review and the government are set to discuss publicly the examinations after markets close May 7, the people said.
Financial shares jumped the most in almost a month yesterday on optimism about the tests. The Treasury and regulators have presented different options for the banks to shore up their books without taking taxpayer money, including selling assets, seeking private capital and converting previous government investments from preferred to common shares.
“Maybe the capital that’s required from these tests is going to be smaller than the market had been anticipating,” said Blake Howells, an analyst at Becker Capital Management, which oversees $1.7 billion in Portland, Oregon, and owns shares of U.S. Bancorp and KeyCorp, referring to the stock rally.
Still, “for the stress test to have any sort of legitimacy, some of the banks are going to have to raise capital,” he said.
Fed Meeting
Fed spokeswoman Michelle Smith declined to comment. The Fed’s Board of Governors met late on May 3rd to discuss the stress tests, according to a posting on the central bank’s Web site, the second Sunday evening meeting on the matter in three weeks.
Last week, the Fed delayed the release of the tests, originally scheduled for yesterday, as banks challenged some of the conclusions. Citigroup Inc. and Bank of America Corp. were among the banks found to need additional capital, people familiar with the matter have said.
Both firms disputed the Fed’s determination. Yesterday, Bank of America gained 19 percent after the company denied it was working on a plan to raise $10 billion. Citigroup rose 7.7 percent.
A person familiar with Citigroup’s plans said the bank wasn’t likely to need new taxpayer cash and was focusing on converting government shares and getting capital from private investors to satisfy regulators.
The number of banks deemed to need more capital has increased from six to eight a week ago, after regulators boosted their target for the reserves the firms must hold, according to a person familiar with the matter.
Capital Ratio
Officials favor tangible common equity equal of about 4 percent of a bank’s assets, up from a 3 percent goal earlier in the process, two people with knowledge of the deliberations said last week.
While banks are trying to avoid the taint of taking federal funds -- and the potential pay restrictions and executive firings that come with it -- the government will also benefit by handing out less cash. Not including repayments, the Treasury has about $110 billion left in the $700 billion Troubled Asset Relief Program that Congress passed last October.
Lawmakers have repeatedly said they won’t approve any more funds. Some lenders, including Goldman Sachs Group Inc., have said they intend to pay back as soon as possible the TARP money they received last year.
President Barack Obama’s spokesman said yesterday that some banks will “undoubtedly” need more capital but the administration expects them to be able to get it in private markets.
TARP Funds
“The administration doesn’t believe we need to go to Congress right now” to seek more money to rescue banks, White House press secretary Robert Gibbs said at his daily briefing.
For those institutions needing more capital, “everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control,” Gibbs added.
Such a result may not appease critics, including Nobel prize laureate in economics Joseph Stiglitz, who have suggested temporary government takeovers to cleanse banks’ balance sheets.
“Rather than financial or economic fixes, it looks like the Treasury really doesn’t have enough money to address the situation, and therefore is going back to this idea that somehow if we change preferred into common, magically the problem goes away,” said Joseph Mason, a banking professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.
The 19 firms include Citigroup, Bank of America, Goldman Sachs, GMAC LLC, MetLife Inc., Fifth Third Bancorp and Regions Financial Corp. The banks in the test hold two-thirds of the assets and more than half of the loans in the U.S. banking system, according to a Fed study released April 24.
Regulators are pushing higher minimum capital levels for the banks to determine whether they can survive a worsening recession. Tangible common equity can be boosted by converting preferred shares to common equity.
U.S. Banks Must Raise Debt Without FDIC to Repay TARP Banks that want to exit from the U.S. government’s capital injections must demonstrate they can issue debt to private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.
The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so.
The new guidance would come before the Federal Reserve’s May 7 publication of results of stress tests on U.S. banks. People familiar with the matter said yesterday that about 10 of the firms will be deemed to need additional capital.
Firms that don’t need stronger buffers may seek to quickly retire existing government stakes. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Northern Trust Corp. have said they want to repay the money. Both New York-based companies sold debt without FDIC guarantees in the past month, as has Chicago-based Northern Trust.
“My hope is this helps with clarity on who are the winners and who are the losers,” said Joel Conn, president of Lakeshore Capital Inc., which invests $90 million.
Bank of New York
Earlier today, Bank of New York Mellon, another bank taking part in the stress tests, raised $1.5 billion of debt, without FDIC backing. The bank said proceeds from the sale will be used to help repay the $3 billion capital injection it got from the TARP last year.
FDIC Chairman Sheila Bair has said banks need to wean themselves off the debt guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment today on the Treasury’s repayment policy.
The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and does not affect outstanding debt, the people familiar with the matter said. On April 14, a Goldman Sachs executive said the bank did not see a direct link between the debt guarantees and the Treasury’s capital injections.
Debt Sales
“We still have some capacity under the FDIC-guaranteed at pretty attractive spreads,” said David Viniar, the company’s chief financial officer, in an April 14 conference call with investors. “We’ll continue to use that when it’s available, but we expect to continue to raise unguaranteed debt when it’s available as well.”
For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations at the firms, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Fed Chairman Ben S. Bernanke told lawmakers today.
“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.
Officials’ “top priority” will be working with the banks to get them on a path toward repaying the taxpayer, including sales of assets or raising private capital, the Fed chief said.
The Obama administration has yet to detail how it intends to implement executive compensation guidelines enacted by Congress, another restriction faced by banks that keep taxpayer funds. The rules limit incentive pay for top executives at banks receiving at least $500 million in rescue funds from the Treasury.
Stress test banks need $75 bln capital: Citi analyst Banks undergoing U.S. government stress tests will need a total of $75 billion in capital, with Bank of America (BAC.N) and Wells Fargo (WFC.N) having the largest need, analyst Keith Horowitz of Citigroup said.
The analyst expects 10 of 16 banks he covers, including KeyCorp (KEY.N), Regions Financial Corp (RF.N) and U.S. Bancorp (USB.N), to raise capital after the stress tests. [ID:nWNAB4147]
While Bank of America is likely to need a substantial increase in common stock, the brokerage said it believes the bank can cover it via conversion of preferred stock.
"The (Bank of America) stock looks the cheapest in the group," the analyst said.
He said he expects Bank of New York Mellon (BK.N), Goldman Sachs (GS.N) and State Street Corp (STT.N) to fare best on the stress tests, and believes valuations for these stocks remain attractive.
Citigroup also downgraded Fifth Third (FITB.O) to "hold" from "buy" and said the bank may need to raise upwards of $2 billion in capital, which is higher than the private preferred balance of $1.1 billion.
BB&T (BBT.N) may need capital but can address the need by cutting its dividend, Horowitz said.
The top 19 U.S. financial institutions have been negotiating with regulators on how much of an additional capital buffer the banks will need to sustain losses that might occur if economic conditions deteriorate further.
Results of the stress test, which will determine the ability of the 19 lenders to weather a deep recession, are due out on Thursday.
Citi, GMAC, Wells Need to Raise New Capital The results of the government's stress tests of the largest 19 U.S. banks continued to trickle out, highlighting the burgeoning gaps between the industry's strong and weak players.
Among the institutions that have been instructed by the Federal Reserve to raise more capital are Wells Fargo, Morgan Stanley, GMAC, State Street, Bank of America, Citigroup and Regions Financial.
Banks that don't need fatter capital cushions include Capital One, American Express, Bank of New York Mellon, Goldman Sachs, MetLife and J.P. Morgan Chase.
Investors might think the economy is stabilizing but they're not ready to celebrate.
Wall Street slid Thursday following a surge earlier in the week and as traders braced for a release of the government report cards on the nation's biggest banks and for the April jobs report on Friday.
Major market indicators dropped more than 1 percent, including the Dow Jones industrial average, which lost 102 points after gaining nearly the same amount Wednesday.
Investors pocketed gains ahead of the release of the government's "stress tests" on banks, which largely met with investors' expectations late Thursday following news reports this week on which financial companies would be asked to raise money.
Stock futures turned higher after the government released its report and said 10 of the nation's 19 largest banks need a total of about $75 billion in new capital to withstand losses if the economy worsens.
"I would say it's a sigh of relief," said Keith Lanigan, managing editor of MidnightTrader, which tracks extended-hours electronic trading.
Stocks began the day higher but quickly reversed course as investors looked past upbeat reports on the job market and retail sales and decided to cut their holdings following what had been a 4.8 percent gain this week in the Standard & Poor's 500 index.
"With the rise we've seen lately there's no sense leaving it all on the table," said Dan Cook, senior market analyst at IG Markets. He said investors likely wanted to remain cautious ahead of the April employment report on Friday.
The Dow ended down 102.43, or 1.2 percent, to 8,409.85 a day after the blue chips jumped 102 points to close above the 8,500 level for the first time in four months. With Thursday's loss, the index is down 4.2 percent for the year.
The S&P 500 index fell 12.14, or 1.3 percent, to 907.39, and the Nasdaq composite index fell 42.86, or 2.4 percent, to 1,716.24.
Financial stocks sold off in afternoon trading after weak demand at a Treasury bond auction raised concerns among investors about the government's ability to raise funds to fight the recession.
The government had to pay greater interest than expected in a sale of 30-year Treasurys. That is worrisome to traders because it could signal that it will become harder for Washington to finance its ambitious economic recovery plans. The higher interest rates also could push up costs for borrowing in areas like mortgages.
Technology shares posted the biggest losses after security software maker Symantec Corp. posted weaker-than-expected results. Retailers were mixed even after many of them, including Wal-Mart Stores Inc., reported better-than-expected April sales.
Symantec reported a loss for its fiscal 2009 fourth quarter, hurt by a hefty charge and lower-than-expected revenue. The stock fell $2.60, or 14.8 percent, to $14.99.
The market seems to already be expecting positive news on the economy is now looking for the next catalyst to take stocks higher after a surge of more than 30 percent from 12-year lows on March 9.
"This is a market that is starting to bake in a lot of positive surprises," said Craig Peckham, a market strategist at Jefferies & Co.
Wal-Mart said sales of Easter merchandise and more shoppers in its stores helped its sales jump 5 percent, much more than the 2.9 percent rise analysts had forecast. Wal-Mart rose 38 cents to $49.89.
Financials mostly fell ahead of the test results. The tests are part of the Obama administration's plan to fortify the financial system. The market rallied this week ahead of the results, despite some initial concerns that the tests would show more pain in the industry.
Citigroup Inc. fell 5 cents to $3.81, while Bank of America Corp. rose 82 cents, or 6.5 percent, to $13.51. Regions Financial Corp. fell 60 cents, or 10.3 percent, to $5.23, while Wells Fargo & Co. fell $2.08, or 7.8 percent, to $24.76.
Two stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to a heavy 8.7 billion shares compared with 8.3 billion shares traded Wednesday.
"Today was a little dose of reality and maybe a little fear coming back into the market," said Joe Saluzzi, co-head of equity trading at Themis Trading LLC.
Saluzzi said investors shouldn't mistake the strong trading volume seen this week as a sign of conviction behind the moves. He said an absence of the big block trades that large financial firms make suggests the trading is more speculative, particularly in financial stocks.
"The real investor needs to be careful," he said.
In economic news, new applications for unemployment benefits fell last week to the lowest level in 14 weeks. That followed a better-than-expected private snapshot of the labor market on Wednesday and ahead of the government's April employment survey.
The monthly job survey from the Labor Department is often regarded as the most important economic news each month. A drop in unemployment could bolster everything from banks to retailers if consumers can continue to make mortgage payments, go shopping and spend money in other ways.
In other trading, the Russell 2000 index of smaller companies fell 12.15, or 2.4 percent, to 492.94.
The yield on the benchmark 10-year Treasury note jumped to 3.27 percent from 3.16 percent late Wednesday. The yield on the 30-year long bond rose to 4.26 percent from 4.11 percent.
The dollar was mixed against other major currencies after the European Central Bank cut its key interest rate a quarter point to 1 percent. Gold prices rose.
Light, sweet crude rose 37 cents to settle at $56.71 per barrel on the New York Mercantile Exchange.
Overseas, Japan's Nikkei stock average jumped 4.6 percent. Britain's FTSE 100 rose 0.1 percent, Germany's DAX index fell 1.6 percent, and France's CAC-40 fell 1 percent.
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