Translated material
“The markets liked the specific numbers”
US stress test results reassure investors
At the time of signing the issue, the official results of stress tests conducted by US financial authorities against 19 of the largest banks were not announced. However, even the day before, according to media reports “from reliable sources,” it became clear that the market giants needed additional financing totaling $100 billion.This turned out to be worse than many forecasts. However, investors were satisfied: the main thing is that they got rid of uncertainty and received a clear signal for further action. Now market participants expect that banks will begin to return to the state the “emergency assistance” received last year.
According to recent reports citing sources in financial circles, Bank of America will need $34 billion, Citigroup will need $5-10 billion, Wells Fargo will need $15 billion, and major mortgage lender GMAC LLC will need $11.5 billion. dollars, and Morgan Stanley - $1.5 billion. Regions Financial Corp, Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc and SunTrust Banks Inc will also need some amount. At the same time, Bank of New York Mellon, American Express Co, Capital One Financial Corp, Goldman Sachs Group Inc, JPMorgan Chase & Co and MetLife Inc do not need additional funds. According to Citigroup analyst Keith Horowitz, banks may need additional capital totaling $75 billion.
However, US financial authorities have already made the main conclusions based on the results of the audits. Treasury Secretary Timothy Geithner said none of the 19 banks are at risk of bankruptcy and the government does not intend to add managers to the companies. Previously, President Barack Obama and representatives of financial authorities stated that the replenishment of capital would be carried out thanks to funds from private investors. Yesterday, the head of the US Federal Reserve System, Ben Bernanke, called on all credit institutions without exception to “reconsider their policies in various areas.” The stress tests, he said, were “comprehensive, thorough and carried out by the combined efforts of various regulators.”
Meanwhile, the amount of $34 billion is more than three times higher than previous estimates of the need for the largest US bank, Bank of America, for additional funds. The revealed lack of capital could affect the career of the bank's CEO, Kenneth Lewis, who was forced to resign as president last week at the insistence of shareholders. As a result, he may have to leave the company where he has worked for more than 40 years. Critics of Mr. Lewis say he should have pulled out of the Merrill Lynch takeover or disclosed the company's financial health to investors. However, Mr. Lewis did not do this at the insistence of the authorities.
Experts believe that the bank can raise capital by converting part of its preferred shares into ordinary shares. The total amount of these securities is about $30 billion. The company can also sell its shares in the Chinese China Construction Bank and the Brazilian Brazil's Itau Unibanco.
Wells Fargo, which received $25 billion in government aid, did not receive government support when buying Wachovia Corp. bank. for $12.5 billion at the end of last year. The bank's chief executive, Dick Kovacevich, called the government's stress tests stupid in March. The famous investor Warren Buffett, who is a major shareholder of the bank, said that Wells Fargo does not need any additional capital. However, many analysts believe that this bank may need a “safety cushion” to protect against “bad” loans.
GMAC will have to contend with losses on mortgages and auto loans. On Tuesday, the bank assured that the bankruptcy of its former owner and partner General Motors will not affect the financial company's activities.
While many banks' capital shortfalls were greater than analysts had expected, financial stocks soared as investors finally got a clearer picture of how the sector's biggest players are handling what may be the worst recession since World War II. Bank of America closed up 17.1% on Wednesday, Citigroup up 16.6% and Wells Fargo & Co up 15.6%, although all of these lenders are in need of additional cash. The Standard & Poor's Financials index gained 8.1%.
“Markets liked the certainty of concrete numbers that showed how much money banks would need in a worst-case scenario,” said Al Frank Asset Management analyst Chris Armbruster.
Banks that successfully pass stress tests, and then other banks that raise enough funds and solve their current problems, will have to return government money received under the Troubled Asset Repurchase Program (TARP). To do this, they will have to prove that they can attract borrowed funds from private investors without guarantees from the Federal Deposit Insurance Corporation.
JPMorgan, Goldman Sachs and Bank of New York Mellon have already sold bonds last month without the help of government guarantees, the people said. Bank of New York Mellon officials said they would soon be ready to return the $3 billion they received under TARP.
“In the future, we will need banks to be able to issue bonds without the support of the regulator. This will be the next milestone in restoring investor confidence in their financial health,” said Mark Bronzo, portfolio manager at Security Global Investors.