US banks raise capital; bad debts soar in Europe

[Naveed Yaseen]

NEW YORK: Morgan Stanley and Wells Fargo sold more than $15 billion of shares and bonds, as the two companies rushed to the head of the line of banks looking to raise funds following government stress tests.

Bank of America Corp got in line too, saying it plans to sell 1.25 billion shares to help meet what the government deemed a $33.9 billion capital shortfall for the lender. Banks are hoping to sell shares fast, in case the soaring stock market starts to retreat, analysts said.

“If I were running a bank, I would sell stock now, too. It’s a great time to ride the wave,” said Joshua Siegel, managing principal at Stone Castle Partners, which owns Bank of America and JP Morgan Chase & Co shares.

US regulators late Thursday announced the results of its stress test of the 19 largest banks, and the relatively small size of the $75 billion capital shortfall heartened European and US bank investors and emboldened issuers.

But the results also evoked scepticism among those who contend the tests were not rigorous enough. The KBW index of US bank stocks rose 12.1 per cent. Bank of America, whose shares have risen more than four fold since early March, closed on Friday up 4.9 per cent for the day at $14.17.

Morgan Stanley sold $4.03 billion in stock Friday, including overallotment shares, while Wells Fargo & Co sold $8.6 billion. Both deals were larger than expected, but came at discounts of more than 11 per cent to their Thursday closing prices. With the stress tests over, US President Barack Obama’s administration plans to focus on reforming regulation of the financial sector, including setting up a systemic risk regulator, sources told Reuters. Despite the extra stock entering the market, Morgan Stanley’s shares rose 3.9 per cent to close at $28.20. The stress test said Morgan Stanley needed to boost its common equity capital buffer by $1.8 billion. Wells Fargo shares rose 13.8 per cent to $28.18. The US stress test found that Wells Fargo needed another $13.7 billion.

The biggest gainer Friday was Cincinnati regional bank Fifth Third Bancorp, which soared 58.8 per cent to $8.49 a share, its highest price in four months. The bank needs to boost common equity capital by $1.1 billion, according to the stress test.

Of the lenders that had to raise money, auto and home lender GMAC LLC was deemed to have an $11.5 billion shortfall, by far the largest deficiency relative to its size. US Treasury Secretary Timothy Geithner told Reuters Television on Friday that President Barack Obama’s administration will provide substantial support to GMAC.

Whether the equity market goes up or down in the near term, demand for bank stocks is finite, and it makes sense to try to issue first, said Brad Hintz, analyst at Sanford C Bernstein. “There are a whole lot of hungry banks stepping up to the banquet table. They know if they’re not first in line, there might not be any shrimp left on the table for them,” he said.

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