Like starved beasts allowed into a buffet, banks have been gorging on the largesse of the capital markets.
In less than two weeks' time, institutions among the 19 that were stress-tested by the government have announced or completed more than $40 billion of debt and equity sales.
It's still early to be sweating the idea of overcapitalization. Companies ordered to find additional funding still have about $55 billion to go before regulators will be appeased. But six companies that sailed through the stress tests showing no need for fresh capital have raised $20 billion of it anyway, accounting for half the amount raised so far by the top 19. And as banks practice more balance-sheet restraint, and reap the bottom-line benefits of an eventual economic recovery, the capital flowing into the industry now may wind up outliving its usefulness.
"Our view is today's capital issuance is going to be tomorrow's buybacks," Morgan Stanley analyst Betsy Graseck said.
As business problems go, excess capital is a good one to have. But banks that build too large a stockpile will eventually hear from investors who want the capital put to work, either through stock repurchases, dividend increases, acquisitions or other growth initiatives.
Before any of that becomes problematic for the industry, though, there are a few other hurdles that banks will have to clear.
Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC, said it's "too soon to call that there's excess capital on the balance sheets," and suggested that banks repay funds received through the Troubled Asset Relief Program before considering any other uses of capital.
The government has not yet organized a process for Tarp repayment, but some banks already have earmarked fresh capital raises for just such a purpose. State Street Corp. on Monday said it will sell $1.5 billion in common stock and issue nonguaranteed senior notes to repurchase preferred equity held by the government. U.S. Bancorp already has raised $2.5 billion in equity and $1 billion in debt to help repay $6.6 billion of Tarp funds.
Presuming the funds are repaid, U.S. Bancorp would have a Tier 1 capital ratio of 9.1%, up from the 8.5% ratio it had pre-Tarp. The Tier 1 common ratio, a new focal point for regulators, would be 6.5%, well above the 4% that the government will be looking for.
But how long will banks want to keep their capital ratios above the recommended levels?
"You really can't help but predict that at some point, the stock [banks] are selling at $10 right now is going to be bought back at $35 when they appear overcapitalized," said Gary Wedbush, head of capital markets at Wedbush Morgan Securities in Los Angeles.
Fresh capital is proving irresistible even to banks that have not had their hand forced by the government.
To Wedbush, that may be a sign that some executives remain worried about potential risks to their balance sheets, particularly in the areas of consumer credit cards and commercial real estate. Others simply might want the capital to keep pace with the pack, for fear that clients will gravitate toward banks with the safest risk profiles, he added. Either way, there's "definitely a willingness right now on the part of investors, the people with the dry powder, to give capital to the banks," Wedbush said.
Among the big offerings to date, Wells Fargo & Co. sold $6.6 billion of common stock, while Bank of America Corp. sold $3 billion of five-year notes. Even PNC Financial Services Group Inc., which was ordered to raise the relatively small amount of $600 million, decided to tap the capital markets for the funding. It filed Thursday to sell as many as 15 million common shares, which based on the price at the time of the filing would bring in more than regulators said the Pittsburgh company needs.
The PNC offering came as a surprise to Matthew Schultheis, an analyst with Boenning & Scattergood Inc., who said he figured PNC would seek to cover the shortfall internally. But he said the extra capital from the stock issuance would be put to good use.
"The guys who are going to keep their Tarp money, like PNC, they're not going to have a buyback coming out of this $600 million," Schultheis said.
PNC declined to comment.
Derek Ferber, a research analyst with SNL Financial, said it's "definitely a toss-up" whether any of the capital being raised now by banks will turn into the excesses of the future.
He envisions two possible scenarios. In one, he said, the recent rally in financial stocks will be followed by improvements in the economy, which would be augmented by industry consolidation and better restraint in lending. In that case, capital will be abundant. In the other scenario, the rally will prove to be premature and the recent capital issuance will become critical to absorb loan losses.
So which of the scenarios does Ferber find more likely?
"In the past nine months, I've given up on guessing what's going to happen next," he said.