Monday, April 27, 2009

Next Market Catalyst - Banks Stress-Test Results

The next catalyst for the US markets has to be the government's stress-testing of banks' results. Most analysts and commentators can only guess what the parameters are like. Some banks will be asked to raise additional capital due to the results of the stress-test.

19 banks were asked to submit to the test. If we look at the table for comparison, their Tier-1 capital would be a start. Those around 10% or below would fall under the "danger list", but its not all definitive, its probably one of the many factors that the government looks at. But Wells Fargo, Bank of America, even American Express and PNC Financial would fall under the "to be watched" category.

Of greater importance will be the Tangible Common Equity Ratio which has been harped on by Bernanke and Geithner. I think this measurement will be more critical. I would worry if the ratio is 4% or lower. Bank of America stands at just 3.1%. Citigroup is making me nervous at 1.7%. PNC Financial is there again at 3.3%, and US Bancorp is also there at 3.7%. Wells Fargo, despite registering such wonderful profits is there at 3.3%.

I think those that are below 4% will be barred from returning TARP funds back to the US government. Which is to say the Bank of America and Wells Fargo will still stay under the "jurisdiction of the US government" and will have to toe the line a lot more when it comes to compensation matters.

JP Morgan and Goldman Sachs are in the clear, and Goldman can return the funds should they wish. Returning the funds would allow Goldman to soothe executive nerves on drastic changes to their compensation scheme, and may act as a buffer to retain and attract talent in this difficult environment.

Even if Bank of America and Well Fargo may be asked to raise more capital. It is not a death sentence. It could just mean that these banks will have to try to convert existing preferred shares into common stock. We have to remember that when Citigroup did a similar announcement of the plan, it rocked the share price of Citigroup.
The blessings of the stress-test is that it will make more transparent the health of major US banks. Even though some may be asked to raise more common equity capital, the general view should be more of a relief to investors that these banks are continually being subjected to more screenings and testing of their viability. The end result of the stress-test is probably a boost to confidence and may actually see banking stocks moving up higher in tandem.

[stress tested]

In February, the Obama administration said 19 bank holding companies with more than $100 billion of assets would have to undergo a stress test. The move was designed to calm fears about the solvency of the banking system. The exams, conducted by more than 150 federal regulators, analyzed potential losses from residential mortgages to complex securities products. Banks will have several days to challenge the findings before the government makes results public the week of May 4.

p/s photos: Janice Man Wing Shan (a model turned actress, she will be a wonderful actress in the future judging by her stunning acting chops displayed in Love Story and La Lingerie)

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