Reply #41: New Worries for Next Tier of Banks By ERIC DASH

[Demeter]

http://www.nytimes.com/2009/04/25/business/economy/25bank.html?_r=1&ref=business



...While Citigroup and Bank of America remain troubled, regional banks subject to the government’s tests — including Regions Financial of Alabama, SunTrust Banks of Georgia and KeyCorp and Fifth Third of Ohio — are girding for huge losses. They are among the hardest hit by the housing bust, and are saddled with a pile of commercial real estate and corporate loans expected to sour further this year. Regions Financial, for example, added just $35 million to its reserves for future loan losses in the first quarter, an amount analysts say may not be enough to cover a surge in its nonperforming loans...

On Friday, Morgan Stanley came forward with its own analysis of which banks might need to raise capital, the latest in a series of private estimates being tallied to allow gambling investors to position themselves to profit from fluctuations in the stock prices of the banks.

The report identified SunTrust, KeyCorp and Regions Financial — all major regional banks — as those that the government would probably determine needed billions in additional capital. Bank of America and Wells Fargo fall into a “gray zone,” the report said. Earlier this week, Keefe, Bruyette & Woods, a boutique investment bank, said all of the 19 banks might need a total of $1 trillion of fresh capital.

David H. Ellison, the chief investment officer of FBR Equity Funds, a mutual fund that invests in financial stocks, said all the uncertainty around the stress test results might provide opportunities for big gains. He has viewed at least a half dozen of such makeshift stress tests produced by research firms. “You make most of your money in financial stocks from going from ugly to O.K., not from good to great,” he said. “Right now, we are ugly.”

Even before official stress test results are released, the gap between the strongest and weakest banks has been widening. Among those best positioned to withstand a sharp downtown without needing capital, analysts say, are the major investment and custodial banks, including Goldman Sachs, Morgan Stanley, the State Street Corporation and Bank of New York Mellon. A handful of well-run commercial banks, like JPMorgan Chase and U.S. Bancorp, are unlikely to need additional money.

Besides the regional lenders, a few big banks are also staring down trouble. Citigroup, which has been bruised by the credit crisis, has already announced plans to strengthen itself by converting a portion of the government’s $45 billion preferred stock investment into common shares. Some analysts say that GMAC, the privately held finance arm of General Motors, and Bank of America may need to consider taking similar action.

Federal officials said that some banks might need to raise additional capital. Others might need to change the form of their existing capital by converting preferred shares into common stock, which is better at absorbing losses. Both measures could dilute existing shareholders or give the government a greater stake.

The prospects of the remaining lenders are even more unclear. Their fate rests wherever federal banking regulators draw the line on how much capital is enough to provide a cushion. Big credit card lenders, like American Express and Capital One, have huge numbers of customers defaulting on their bills, but they typically set aside more money to cover losses than traditional banks. The BB&T Corporation of North Carolina, PNC Financial and Wells Fargo all showcased their ability to generate earnings in the first quarter, but face a coming wave of heavy losses. MetLife Bank, which is part of the insurance giant, is also a wild card.

Even so, investors found some relief in the vague 21-page report on stress tests put out Friday afternoon by the Fed. In fact, after starting the day down on nervousness that the report would reveal more trouble at the banks, financial stocks rose sharply when the report suggested the 19 banks were well capitalized.

Mr. Ellison said the Fed’s report seemed to suggest that the stress test results would not be worse than Wall Street expected.

“Three months ago, all the banks were going to be nationalized and you might just give up and go home,” he said. “We are now getting a reality check on how bad it is: sure, it’s bad, but it’s not the end of the world.”