Eleven of 12 top banks may need more capital, says analyst

MAY 05, 2009
Trying to replicate the criteria used by the government for its stress test on major financial firms, an analyst on Tuesday said 11 of the nation's 12 largest commercial banks will need additional capital. In a research note, Friedman, Billings, Ramsey & Co. analyst Paul Miller said most banks will need to bolster the capital positions based on recently completed government stress test. Miller did note, however, that some assumptions had to be made while running his version of the test since the government did not provide all the details about its formula. Among the 12 banks Miller reviewed, only JPMorgan Chase & Co. did not need to raise new capital. The government is expected to provide the actual results of the stress test on Thursday. In recent weeks, the government has reviewed 19 financial institutions to determine how they would fare amid worsening economic conditions, including a continued rise in unemployment. The results of the tests are likely to outline how much of a capital cushion the banks would need to be able to handle additional loan losses amid deteriorating economic conditions. Miller reviewed 12 of the 19 financial firms trying to match the government's scenarios to determine how much additional capital they would need. FBR also ran two stress tests based on its own economic modeling and loan-loss expectations, which it considers more severe than the assumptions made for the government tests. In those instances, FBR said all 12 banks it reviewed would need additional capital to help cover potential losses, with most needing significantly more capital than the government test might indicate. Aside from JPMorgan, the 11 other banks FBR reviewed included: Bank of America Corp.; Wells Fargo & Co.; Citigroup Inc.; PNC Financial Services Group Inc.; U.S. Bancorp; Capital One Financial Corp.; SunTrust Banks Inc.; Regions Financial Corp.; BB&T Corp.; Fifth Third Bancorp; and KeyCorp. Based on the government stress test scenario, Miller said Bank of America and Wells Fargo would need the most capital. Charlotte, N.C.-based Bank of America would need $19 billion in new cash to meet minimum standards, while San Francisco-based Wells Fargo would need $12 billion. Under FBR's two stress scenarios, Bank of America would need between $31 billion and $78 billion depending on the severity of the downturn, while Wells Fargo would need between $26 billion and $66 billion in additional capital. Miller said the easiest way for bank's to raise the capital and meet the requirements would be to convert preferred shares it issued the government last fall as part of the Troubled Asset Relief Program into common stock. Preferred shares are essentially a loan that pays a hefty dividend. The conversion creates a better equity base to absorb potential losses, while also eliminating additional costs of repaying the preferred shares. Another possibility would be for traditional capital raises through new stock offerings. Some banks have recently taken advantage of the improving equity market to raise new capital, including Goldman Sachs Group Inc.

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