WASHINGTON — Federal regulators said Thursday that 10 of the 19 largest banking companies will need an additional $75 billion in capital to weather an extreme economic downturn over the next two years.
Treasury Secretary Timothy Geithner, at a press conference announcing the results of the stress tests, indicated the companies are not expected to turn to the government for the money.
"Our sense is that the banks are reasonably confident that they're going to be able to meet these incremental needs through private sources," he said.
Indeed, several banks announced plans to address their capital shortfalls.
Bank of America, which must raise $33.9 billion in capital, laid out a multifaceted approach during an analyst call. Chief financial officer Joe Price said roughly half of the funds would be raised by turning to private investors, by selling up to 1.25 billion shares of common stock and converting certain preferred shares.
Another $10 billion would come from asset sales and joint ventures, with the rest coming from core earnings over the next two quarters. Converting preferred shares owned by the government would be a "last resort," he said.
CEO Kenneth Lewis said that the company was looking to sell First Republic Bank and Columbia Asset Management, which he called "redundancies" after its deal for Merrill Lynch & Co., and form at least two joint ventures that he wouldn't discuss further. He said however that B of A had no plans of spinning off or creating joint ventures with its investment bank or trading desk.
In a surprising move, the banking company said it plans to phase out the loss-sharing deal with the government that would guarantee $118 billion of its assets.
Price said the two sides had ironed out a non-binding term sheet, not a signed agreement, which should make it easier to unwind the relationship forged in January as B of A was completing the Merrill purchase.
Price cautioned during the analyst call that there are "certain components embedded in the term sheet that are tough to negotiate," though he said in a subsequent call with media that preliminary discussions with regulators have been positive.
"There is receptivity but it will take some time," he said. "Bear in mind that we're not ending an agreement, but instead we are simply stopping the process." He said B of A has grown more comfortable with the underlying quality of certain assets and its ability to reduce exposures, adding that the company can avoid issuing Treasury $4 billion in preferred stock by getting out of the loss-sharing arrangement.
Lewis said Bank of America objected to what it saw as overestimated losses and underestimated earnings power under the government's testing process. For instance, he said the company should have gotten more credit for the quality of its first residential mortgage book, where losses have been less than peers, given a lack of subprime lending. "It is what hurt us the most and we had a big disagreement about it," he said.
Lewis meanwhile provided some insight into the communiqué between Bank of America and regulators over such differences of opinion. "In virtually every case I wouldn't call it negotiations," he said during the media call. "I would call it us supplying information."
Joking about the stress the test has imposed, Lewis concluded: "Never has a test been so aptly named."
Citigroup said it would increase the amount of preferred securities and trust-preferred securities that it will exchange for common stock by $5.5 billion, to $33 billion.
Citigroup will expand its previously announced public exchange offers by $5.5 billion to meet the capital needs exposed by the stress test. The company will now try to convert up to $33 billion of preferred stock and trust preferred securities into common stock, at the previously announced conversion price of $3.25.
Together with asset sales, headcount reductions and moves to rein in the balance sheet, Citigroup "will have done everything we need to do to make sure we comply with the capital cushion that is needed under the stress test," Citigroup CEO Vikram Pandit said on a conference call with reporters late Thursday.
Pandit said he is "kind of glad the results have been announced and that this process is behind us.
"Clarity and transparency is always helpful in the marketplace. In our own case it was probably more important than in others," he said. But he said the scenarios the government used in the stress tests were "very, very stark."
"The two-year scenario they're talking about is worse than any two-year stretch during the Great Depression," Pandit said.
Citigroup plans to launch its exchange offers shortly. When they are done, the U.S. government would be the bank's largest shareholder, with a 34% stake in the common stock. Without the additional $5.5 billion in planned exchanges, the government stake would have been 36%.
Chief Financial Officer Edward "Ned" J. Kelly 3rd said the bank, which already has suspended dividends on preferred securities, "have not and will not suspend the dividends with respect to the trust preferreds." In trying to convince holders of trust preferred securities to convert their stakes into common shares, "it's a carrot rather than a stick," he said.
Kelly said the bank has no plans to increase the exchange size again. When asked what could change that expectation, he said it "probably defies my imagination in terms of what could," adding, "I've been accused of being flip in the past, but yes, I'm as confident as I can be."
Wells Fargo & Co.
About an hour before the government announced its results, Wells Fargo announced plans to raise $6 billion in additional capital by selling common stock. That's less than half of the $13.7 billion the government is requiring.
John Stumpf, CEO of the $1.3 trillion-asset San Francisco company, said in a subsequent conference call Thursday evening that the company would make up the difference by getting credit from regulators for the difference between the government's earnings assumptions for Wells for the second and third quarters, and the company's actual results for those time periods.
Stumpf also said the company has no plans to convert into common its $25 billion in Tarp capital.
"We're simply not interested in doing that - there's plenty of capital in this company," Stumpf said.
Additionally, Wells will repay the Tarp money "as soon as we practically can."
GMAC said it would raise the $11.5 billion it needs through some combination of issuing common stock or mandatory convertible preferred shares and converting existing equity.
The New York auto and mortgage lender, which is 51%-owned by Cerberus Capital Management LP, was only company in the group of 19 whose "resources other than capital to absorb losses" in the worst-case scenario was a negative number.
The $180 billion-asset GMAC in December converted to a bank holding company and received $5 billion through Tarp.
Regions Financial Corp.
Regions said it was still refining its capital plans but expects its "sources of capital… to be entirely non-governmental." Methods could include liability management strategies, issuance of common equity, and the sale of selected non-core businesses or assets.
SunTrust Banks Inc.
SunTrust was told it needs to add $2.2 billion of capital, and the Atlanta-based bank said it would "evaluate multiple alternatives" to raise capital, but provided no specifics.
Morgan Stanley was told to raise another $1.8 billion, a request that the firm says will be answered with a $2 billion common stock offering that the firm commenced on Thursday.
Morgan Stanley also said Thursday that it is planning a $3 billion debt offering, and that the notes will not carry any FDIC guarantees.
With "more than sufficient Tier 1 capital," the firm says it will repay Tarp funds as soon as possible, pending regulatory approval.
KeyCorp's CEO Henry Meyer said the Cleveland company has "a range of available alternatives" to raise the $1.8 billion it needs after failing the government's so-called stress test.
It's "non-government" alternatives include issuing common stock and exchanging common shares for outstanding preferred and trust -preferred shares, Meyer said in a press release on Thursday.
Fifth Third Bancorp
Fifth Third said it would raise the $1.1 billion it needs by selling nonstrategic assets, including stock positions with unrecognized gains or available-for-sale securities which already have yielded gains. It said it also will consider exchanging outstanding Fifth Third securities for cash or common equity, which would have the added benefit of erasing the dividend commitment associated with the noncommon equity securities.
PNC Financial Services Group Inc.
PNC said it will come up with $600 million in additional common shareholders' equity through "growth in retained earnings and other capital market alternatives," and will not convert preferred shares issued under the Treasury Department's Capital Purchase Program.
The company said it plans to redeem the $7.6 billion government investment "as soon as appropriate, subject to approval" by regulators.
The collective $75 billion hole facing the 10 firms is far less than many had predicted banks would need to raise — and signals the Obama administration may not need to seek additional funds for the Troubled Asset Relief Program.
Of the initial $700 billion granted by Congress last fall, the Treasury has about $100 billion remaining, a spokesman said.
If the banks raise money privately or convert their stock, the Treasury will not need little — if any — of those remaining Tarp funds to assist the largest banking companies. "We believe that we can meet the incremental capital needs identified through this assessment within the current resource envelope," Geithner said.
Nine banks do not need to raise capital, including American Express Co., Bank of New York Mellon Corp., JPMorgan Chase & Co. and Goldman Sachs. Observers expect those institutions to be the first of the largest banking companies to successfully repay their Tarp funds.
But for a strong first quarter, Treasury said the collective capital hole would have been $185 billion. But because of bankers' actions, such as asset sales and restructured capital instruments, the capital buffer need is much less than half that.
The stress tests found that the 19 firms could suffer losses of up to $600 billion under its adverse economic scenario. After taking into account losses, revenues, and reserves, the banks would need $185 billion in additional capital. But the banks' strong first-quarter results whittled that total to $75 billion.
The quarter was particularly helpful for Citigroup, which regulators said would have needed to raise $92.6 billion before first-quarter figures were taken into account.
B of A also improved its standing in the first quarter, reducing its capital needs by 27%, to $33.9 billion.
Wells Fargo's capital needs declined 21%, to $13.7 billion, as a result of the first-quarter performance.
Morgan Stanley's capital needs dropped 78%, to $1.8 billion.
Of the 19 banks, only GMAC's situation worsened in the first quarter. Its capital needs rose by 72% — or $4.8 billion — to $11.5 billion.
Regulators announced in February that they were conducting stress tests of the 19 banking companies with more than $100 billion in assets using a baseline and adverse economic scenarios for 2009 and 2010.
Under the adverse scenario, the stress tests showed that the banks would have $102.3 billion of losses in first-lien mortgages, $83.2 billion in losses from second liens, $82.4 billion from credit cards, $60 billion from commercial loans, $53 billion from commercial real estate loans, and $35 billion from securities.