Pandemic prompts banks flush with capital to raise more

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For all the talk about the banking industry being well capitalized, a number of banks aren’t taking any chances during the coronavirus crisis.

Several dozen banks have raised capital since COVID-19 was declared a global pandemic. Some are raising capital to provide an extra buffer for credit losses. Others are stocking up now for potential acquisition and lending opportunities.

More banks are expected to turn to investors in coming months.

OceanFirst Financial in Toms River, N.J., has raised capital twice in the past month, issuing subordinated debt on April 29 and preferred stock two days later. While there is a defensive reason, the $10.5 billion-asset company also wants to be ready to expand when the crisis passes.

“Typically, on the back side of any period of stress, there’s strong demand for credit,” said Christopher Maher, OceanFirst’s chairman and CEO.

“Banks have an opportunity to play important roles in recoveries,” Maher added. “I do think there will be acquisition opportunities again going into 2021. The additional capital opens up our strategic options.”

Banks in general are finding receptive investors and reasonable pricing. Low interest rates have also provided an opportunity to affordably raise capital by issuing senior and subordinated debt.

That may not always be the case, industry experts said.

“It’s times like this that banks are reminded it can be really smart to raise capital before you need it,” said Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets.

“The markets are open now, but you really don’t know when that door will slam shut, given all the uncertainty,” Thompson added. “I can tell you more banks are looking at this, and regulators, generally, are of the mind that the more capital the better.”

Capital hasn’t been a problem for banks in recent years.

The total risk-based capital ratio for all banks was 14.63% on Dec. 31, according to the Federal Deposit Insurance Corp. That was an improvement from 12.77% at the end of 2007, when banks were heading toward the financial crisis.

If the steep and sudden downturn drags on for several quarters, capital needs will mount across the industry — with the possible exception of banks that are extremely well capitalized, said Jon Winick, CEO of Clark Street Capital.

“We may have a long way to go,” Winick said. “There’s a lot more that we don’t know than we do about this thing.”

A survey of 104 bankers conducted by D.A. Davidson as part of its virtual conference in early May found that nearly one in five expect to raise capital over the near term.

“That’s significant,” said Russell Gunther, an analyst at D.A. Davidson. “I think the real number could even be higher than that. I suspect some bankers are not quite ready to check the box on raising capital but will get there before long.”

An overwhelming majority of bankers who participated in the conference expect steep loan-loss rates and a protracted economic slump that likely will extend through much of this year — or beyond.

Against that backdrop, even companies with solid capital levels are bound to need more, or would stand to benefit from having more on hand when conditions improve.

“A lot of banks are focused internally now — on their balance sheets and where there could be losses,” Gunther said. “I think that some really strong, very well-capitalized banks could take advantage of the lack of competition. It could be an incredible time to take market share.”

“Banks have an opportunity to play important roles in recoveries,” says OceanFirst CEO Christopher Maher. “Think there will be acquisition opportunities again going into 2021."

Hilltop Holdings in Dallas raised about $200 million in subordinated debt earlier this year. Before pricing the offering, the $15.7 billion-asset company intends to be among the banks benefiting from an eventual recovery, Hilltop President and CEO Jeremy Ford said.

“I think first and foremost, we're going to continue to be patient and work on our own businesses,” Ford said during the company’s earnings call. “When the environment presents itself, we're going to be very aggressive.”

Larger banks also are boosting capital levels, including Citizens Financial Group, Fifth Third Bancorp and Regions Financial.

The $178 billion-asset Citizens and its bank each priced a $750 million offering of senior debt in late April.

“Maintaining a strong capital and liquidity position is of paramount importance in managing through this stress period,” Bruce Van Saun, Citizens’ chairman and CEO, said at a recent conference.

Citizens also wants to forge ahead with growth initiatives, including investments in digital platforms and payments offerings.

“Our philosophy here at Citizens is to keep making those investments, not to pause, but look to drive top-line growth and come out of this period stronger relative to our peers,” Van Saun said.

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