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IBDvalueinvestin (99.64)

Are you ready for next wave of Bank Dilution?

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May 14, 2009 – Comments (2) | RELATED TICKERS: BAC , WFC , C

Many in the economic world see the bank stress as a FED. setup to get banks to dilute shareholders so that the FED. does not have to give them more money.

About 10 U.S. Stress Test Banks to Need More Capital May 5, 2009, 7:39 am

About 10 of the 19 largest U.S. banks being stress tested will be instructed by regulators to raise more capital, Reuters reported, citing a source familiar with official talks.

The banks have been negotiating with their regulators about the depth of their capital needs, should the recession prove to be deeper and longer than anticipated. Markets have been anxiously anticipating the results, which will differentiate the strongest banks from those still expected to sustain considerable credit losses.

The exact roster of banks needing to build their capital positions is still unclear, Reuters said.

Banks are expected to be briefed on the official results on Tuesday. The Federal Reserve and Treasury Department will also tell them how policy makers plan to publicly unveil the market-sensitive results, the source said, speaking anonymously because the discussions are private.

The Treasury and Fed declined to comment on how many banks will be directed to raise more capital, Reuters said.

The largest banks have spent recent days making the case to regulators that they have the financial firepower to withstand a deeper recession, as Bank of America on Monday denied a report it was trying to raise capital of $10 billion.

Some industry insiders worry the stress test results come at a time when the sector is starting to see positive effects from some surprisingly strong first-quarter earnings figures.

“I think the great risk there is that you create some new uncertainty and concerns at the very time the financial condition of the banking industry is turning for the better,” Wayne Abernathy, an executive at the American Bankers Association and a former Treasury official, said earlier on Monday.

Banks found to be in need of more capital will have to embark on a recovery plan that could involve converting preferred stock, raising fresh private capital, or accepting government help — assistance that comes with close scrutiny from Congress that will certainly be unwelcome on Wall Street.

Banks found to need capital will likely want to lay out capital-raising plans quickly to avoid being punished by panicky investors, although regulators won’t require them to put a plan on the table immediately.

The emphasis will be placed on raising capital from within or private outlets. Pouring more public money into banks would put political pressure on President Barack Obama, whose administration is keen to avoid asking lawmakers to approve more bailout money for shortfalls that some analysts think may reach $150 billion.

The Treasury could soon have more funds on hand to infuse into weaker institutions, as officials estimate that stronger banks will return at least $25 billion doled out from the government’s financial rescue fund. However, they want to ensure enough capital remains in the system as a whole.

Policy makers are expected to soon lay out conditions banks would need to meet to return funds.

White House spokesman Robert Gibbs on Monday told reporters that the administration does not see a need to ask Congress for additional funds to support banks, and that the banks will be encouraged to seek extra funds through private sources.

“I think 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,” Mr. Gibbs said.

He also said that the banks themselves will determine which steps they will take to raise capital. “They’ll have a certain amount of time to put together a plan that meets … the test of regulators to ensure that stability,” Mr. Gibbs told reporters.

Some banks have complained that regulators were too harsh in their assessment over how much of a buffer they need to absorb future losses, and were underestimating profitability.

“The banking system can handle an awful lot of loss and be okay,” JPMorgan Chase Chief Executive Jamie Dimon said on a conference call, adding that he agreed with investor Warren E. Buffett, who said many banks have enough earning power to make up for future losses.

Bank of America shares rose more than 19 percent after it denied a Financial Times report that it was working on plans to raise fresh funds to fill a $10 billion capital hole.

The KBW Banks index, which includes about two dozen large banks including Bank of America, rose almost 15 percent.

But investors remained on edge as Thursday’s deadline neared. The Associated Press reported that Wells Fargo was asked to raise more capital after its stress test.

Citigroup has also been identified as a bank needing to raise its capital buffer. The firm will need to raise its common equity by up to $10 billion, Reuters reported, citing a person familiar with the matter.

Bank of America, Wells Fargo and JPMorgan did not immediately respond late on Monday to a request for comment, Reuters said. An official from Citigroup declined comment, it added.

Ratings agency Standard & Poor’s said it may lower the counterparty credit ratings of 22 financial firms — including Bank of America, Wells Fargo and Citigroup — based on results of its own stress testing.

“These rating actions identify companies that we believe have at least a one-in-two likelihood of a … downgrade within 90 days,” S.& P. said in a statement. “That said, we believe that most rated institutions will be able to earn their way out of these credit losses during the cycle.”

As analysts crunched their own numbers, at least one found that balance sheets may not be in as bad a shape as feared.

David Trone, a Fox-Pitt Kelton bank analyst, told Reuters that he expected Thursday’s results to show a few banks were in need of more capital, although the shortfalls would probably be modest and “bank stocks won’t collapse.”

The U.S. Federal Reserve and other regulators have spent the last few weeks poring over holdings of the 19 largest banks, examining real estate and other assets that have lost significant value as the housing market crashed.

The process aimed to gauge how banks would hold up if the economy were to continue its steep descent and home prices fell another 22 percent this year and 7 percent in 2010.

The institutions undergoing stress tests include Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase, Morgan Stanley, MetLife, Wells Fargo, PNC Financial Services Group , U. S. Bancorp, Bank of New York Mellon, SunTrust Banks, State Street , Capital One Financial, BB&T , Regions Financial , American Express, Fifth Third Bancorp, KeyCorp and GMAC .

 

2 Comments – Post Your Own

#1) On May 14, 2009 at 10:44 AM, IBDvalueinvestin (99.64) wrote:

Its already starting with PNC today:

PNC, KeyCorp issuing stock to fill capital needsat Reuters(Thu 9:51am)

 

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#2) On May 14, 2009 at 12:01 PM, awallejr (79.68) wrote:

Yeah but take C for example, they are raising it by converting current preferreds into common.  You are right that does dilute the shares, which is already factored into its current price.  But on the positive C no longer has to pay those burdensome dividends.  Also they can always repurchase the Fed shares over time as things improve.  I'd rather have dilutive shares of an eventual profitable company, than nondilutive shares of a bankrupt company.

Additionally, and time will tell, according to some (like Bove)  over capitalizing the banks could lead to some pretty massive earnings down the road.  Banks will still see some pain as we pass through this recession, but they really should get through it now.  Buying opportunity of a lifetime for the truly patient investor imo.  Next earnings round in July should prove very interesting.

Note:  I am long C (10+ year horizon), and still in accumulating mode.

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