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Analysts mixed on banks as test results loom

Analysts mixed on banks as test results loom

As bank stress test results approach, analysts are no longer expecting worst-case scenarios for the broader sector. Analysts remain mixed on the outlook, however, when it comes to the individual firms.
With the government expected to release results Thursday about how 19 banks fared under a stress test to determine if they would need additional capital amid a weakening economy, Friedman, Billings, Ramsey & Co. analyst Paul Miller said 11 of 12 banks he recently reviewed using the basic criteria from the government's test will need more capital to help cushion against potential future losses.
Only JPMorgan Chase & Co., among the 12 banks Miller reviewed, would not need additional capital. New York-based JPMorgan shares fell $1.17, or 3.3 percent, to $34.62 in late afternoon trading Tuesday.
Based on the government stress test scenario, Miller said Bank of America would need the most capital. Charlotte, N.C.-based Bank of America would need $19 billion in new cash to meet minimum standards, Miller wrote in the note.
Miller also said that under two scenarios worse than the government's projections, Bank of America would need between $31 billion and $78 billion to handle potential loan and investment losses. Under the more stringent scenarios, Miller said all 12 large commercial banks he reviewed would need capital.
However, not all analysts believe Bank of America, which has been among the hardest hit by the downturn and received $45 billion in government support, might be facing another capital raise after the stress test results are released. Fox-Pitt Kelton's Andrew Marquardt said based on his version of a stress test, Bank of America would need no additional capital.
Marquardt did caution that his scenario might fall short of the government's estimation, meaning Bank of America could still be forced to raise capital. If that were the case, Marquardt said a $10 billion raise could dilute current Bank of America shareholders by between 18 percent and 25 percent, less than the market had previously anticipated.
Shares of Bank of America gained 53 cents, or 5.1 percent, to $10.91.
Both Marquardt and Miller said that two potential scenarios for capital raises would be a traditional stock offering or the conversion of preferred shares that banks issued the government last fall as part of the Troubled Asset Relief Program into common stock.
Preferred shares are essentially a loan that pays a hefty dividend. The conversion creates a better equity base to absorb potential losses, while also eliminating additional costs of paying the dividend and buying back the shares from the government.
Traditional capital raises could be made easier by some of the recovery seen in the equity market over the past two months. Some banks have recently taken advantage of the improving market to raise new capital, including Goldman Sachs Group Inc.
Either stock offerings or the conversion of the government's preferred shares at a higher conversion price would mean less dilution for current shareholders, while simultaneously bolstering banks' capital bases.
Stuart Plesser, an analyst at Standard & Poor's equity research unit, upgraded his view on the diversified banks and diversified financial services sub-sectors of the broader financial industry, noting that potential shareholder dilution might not be as severe as originally thought.
Plesser upgraded the two sub-sectors to "Neutral" from "Negative."
Plesser also noted that while loan-loss provisions will likely remain high through 2009 _ nearly all banks facing mounting losses as more customers default on loans _ much of those provisions should be covered by improving lending spreads, mortgage banking income and trading profits.


Updated : 2021-04-14 01:42 GMT+08:00