Bank Stocks Jump As Investors Cheer Leaked Test Results
After three months of waiting for regulators to finish their stress tests of bank capital levels, investors exhaled on Wednesday as results began to leak out a day ahead of their official release.
According to various reports, six of the 19 scrutinized institutions were judged to be adequately capitalized, even in the event of a somewhat gloomy economic scenario. JPMorgan (JPM), Goldman Sachs (GS), Met Life (MET), American Express (AXP), Bank of New York-Mellon (BK) and Morgan Stanley (MS) all got a clean bill of health.
Shares of all the firms rose on the day, with MetLife and Bank of New York seeing double-digit gains.
But less-favorable diagnoses also were greeted as positive news. Amid reports that it will have to fill a $35 billion capital hole, shares of Bank of America (BAC) jumped 17%. So did Wells Fargo (WFC), said to need $15 billion in capital. Citigroup (C), with a need for a $5 billion buffer, rose 16%.
GMAC, the privately held auto financing arm of GM (GM), was also reported to need $11.5 billion.
When Bad Looks Good
Brian Bethune, chief U.S. financial economist at IHS Global Insight, said the government's effort to disclose the real state of bank finances shows that "it's not all that pretty under there, but it's not as ugly as some people thought."
Even the apparent negative news — that many financials are short of capital — was much less negative on closer inspection.
The shortages measured by regulators don't reflect a lack of capital as much as a lack of the right kind of capital — common equity.
This means that banks can avoid raising new capital if they opt to convert the Treasury's past preferred share investments into common shares.
BofA, for example, has received $45 billion in preferred equity. Converting that to common shares would be more than enough to cover its $35 billion capital needs.
"It is conceivable that Bank of America could convert its existing preferred stock, and put the capital issue behind it assuming the economy does not take another significant leg down," Citi analyst Keith Horowitz said in a research report Wednesday.
If BofA did convert $35 billion of government capital, however, that would give the U.S. a stake of roughly 40%, while heavily diluting current shareholders.
But the bank does have other options for raising capital, including asset sales.
"Our analysis shows dilution could range from as low as 20% to as high as 35%," Citi analysts wrote
Bank Stocks Jump As Investors Cheer Leaked Test Results
After three months of waiting for regulators to finish their stress tests of bank capital levels, investors exhaled on Wednesday as results began to leak out a day ahead of their official release.
According to various reports, six of the 19 scrutinized institutions were judged to be adequately capitalized, even in the event of a somewhat gloomy economic scenario. JPMorgan (JPM), Goldman Sachs (GS), Met Life (MET), American Express (AXP), Bank of New York-Mellon (BK) and Morgan Stanley (MS) all got a clean bill of health.
Shares of all the firms rose on the day, with MetLife and Bank of New York seeing double-digit gains.
But less-favorable diagnoses also were greeted as positive news. Amid reports that it will have to fill a $35 billion capital hole, shares of Bank of America (BAC) jumped 17%. So did Wells Fargo (WFC), said to need $15 billion in capital. Citigroup (C), with a need for a $5 billion buffer, rose 16%.
GMAC, the privately held auto financing arm of GM (GM), was also reported to need $11.5 billion.
When Bad Looks Good
Brian Bethune, chief U.S. financial economist at IHS Global Insight, said the government's effort to disclose the real state of bank finances shows that "it's not all that pretty under there, but it's not as ugly as some people thought."
Even the apparent negative news — that many financials are short of capital — was much less negative on closer inspection.
The shortages measured by regulators don't reflect a lack of capital as much as a lack of the right kind of capital — common equity.
This means that banks can avoid raising new capital if they opt to convert the Treasury's past preferred share investments into common shares.
BofA, for example, has received $45 billion in preferred equity. Converting that to common shares would be more than enough to cover its $35 billion capital needs.
"It is conceivable that Bank of America could convert its existing preferred stock, and put the capital issue behind it assuming the economy does not take another significant leg down," Citi analyst Keith Horowitz said in a research report Wednesday.
If BofA did convert $35 billion of government capital, however, that would give the U.S. a stake of roughly 40%, while heavily diluting current shareholders.
But the bank does have other options for raising capital, including asset sales.
"Our analysis shows dilution could range from as low as 20% to as high as 35%," Citi analysts wrote |