Hot finance topics

Three of the largest banks operating in St. Louis flunked the government’s stress test last week and will have to raise new capital. They include Bank of America, ranked No. 2 in St. Louis market share, along with fifth-ranked Regions Bank and sixth-ranked PNC Financial, the new owner of National City Bank.

What does that mean for St. Louis? Probably not much, say bankers and bank analysts here.

That’s because, one way or another, they’ll all come up with the needed capital, analysts say. Investors are taking a new interest in bank stocks, which makes capital-raising much easier.

"The window for all financial institutions to raise capital, away from the government, is definitely open," said long-time bank analyst Joe Stieven of Stieven Capital Advisors. "There appears to be a lot of money sitting on the sidelines ready to go."

If the private market won’t come up with the cash, there’s always Uncle Sam. The government could fill much of the gap by converting much of its past investment in the banks from preferred shares into common equity.

All that makes it unlikely that the big banks will try to shrink their way into capital compliance by restricting lending, according to analysts. If they did, there are plenty of healthy St. Louis banks to take up lending slack.

Wells Fargo & Co., also under orders to raise capital, raised $8.6 billion in a stock sale on Friday, 25 percent more than it had planned. Morgan Stanley, also under a capital mandate, raised $8 billion by selling stocks and bonds.

Bank stocks skyrocketed last week as word of the stress test results leaked out, and economic news indicated that the recession may be easing. The KBW Index of large-bank stocks rose 12 percent on Friday and 33 percent last week.

The government named 19 banks that it considers too big to fail and ran them through the stress tests. The tests assumed that the recession gets much worse, with unemployment above 10 percent (it was 8.9 percent in April) and loans defaulting at rates greater than in the Great Depression.

The results divided the nation’s biggest banks into two groups. Nine passed the test and got the government’s seal of approval. They include U.S. Bank, which ranks first in the St. Louis market, holding 18 percent of the region’s deposits in June 2008. The 10 other banks were told to raise more capital by November.

The results seemed to reassure investors, who had worried that the capital shortfalls could be much worse.

"It appears they’ll be able to raise that capital very quickly," said Ken Crawford, portfolio manager at Argent Capital Management in Clayton. "If they’d tried to do that a month or two ago, they’d have been crushed," he said. "Part of it is the economy — lots of talk about green shoots — and some indication that the residential housing market is stabilizing."

The stress tests put a limit on the downside, removing some of the fear and allowing investors to look at potential profits, said Chris Armbruster, analyst at Al Frank Asset Management in California. "Today is a good time to be a bank. You can borrow at practically nothing and lend it out at 6 percent," he said.

In banking, capital is a cushion of money that can absorb losses and save the bank from failure. Using a strict definition of capital, the government insisted that the banks have $3 in capital for every $100 in assets.

Besides raising new capital, banks could also meet the standard by reducing assets, either by selling them off or perhaps by reducing lending quick cash advance. Crawford thinks a loan crunch is unlikely, in part because banks are already tight-fisted.

"Lending standards have been ratcheted up very high, perhaps to restrictive levels," he said.

In theory, banks might be able to loosen lending if they can put capital concerns behind them, analysts noted. Meanwhile, 146 banks operate branches in St. Louis, providing lots of competition.

Another way to meet the standard is to use money already invested in the banks through the U.S. Treasury’s bank bailout program. That money is held in bank preferred stock, paying the taxpayers a 5 percent dividend. Converting that to common stock would help meet the capital standard. The government would no longer get a dividend, but it would get a voting stake in the bank.

Bank of America, which held a 14 percent share of the St. Louis market, will have to raise $33.9 billion in new capital. The bank, based in Charlotte, N.C., says it will reach the goal by selling new stock to investors, and perhaps by convincing private holders of preferred stock to convert to common shares. The bank is also selling assets, including First Republic Bank and its Columbia Management unit.

"They have a shot to pull it off," said Tom Kersting, banking analyst at Edward Jones in Des Peres.

The bank has already taken $45 billion from the government, but doesn’t want to convert that to common shares.

The government has already restricted executive pay at banks that have taken government money. Bankers fear that Washington might be tempted to oust management, or influence lending policy, if they ask for more help.

PNC Financial’s National City Bank had 4 percent of the St. Louis banking market. PNC, based in Pittsburgh, is under orders to raise only $600 million in capital, a relatively small sum which it says it will raise by saving up profits.

Regions Financial held 5 percent of area deposits, and the Alabama-based bank isn’t happy with the government’s demand for $2.5 million more in capital. Regions says the stress tests were unrealistically harsh. For test purposes, the government assumed that the bank’s current losses on lending would triple. That’s unlikely, the bank said, noting that Fed Chairman Ben Bernanke expects the economy to begin improving later this year.

Regions has been beset by failing construction and commercial real estate loans, mainly in the Southeast. It took $3.5 billion from the Treasury’s TARP bank recapitalization program.

"The good news for Regions is that they have company," said Crawford, the portfolio manager. "Those banks that tried to raise capital were successful in doing it quickly," he said.

Wells Fargo and Citigroup have large operations in St. Louis, although no bank branches, and both are also under orders to raise capital.

Wells still must raise about $5 billion. It owns Wells Fargo Advisors, the new name for what was Wachovia Securities. The unit employs 4,800 people in St. Louis, mainly at its Jefferson Avenue headquarters. Analyst Kersting doubts Wells would be tempted to sell the unit. "Wells Fargo was always very interested in owing a quality brokerage firm. It fits very nicely with their business," he said.

Citigroup is selling a small bank and a money management firm to help raise capital. It owns CitiMortgage, based in St. Charles County. The bank has given no indication that the mortgage unit might be sold.

Source