Investment Banks Again Profit As Regional Banks Exit Bailout

Regional banks KeyCorp (KEY) and SunTrust Banks Inc. (STI) announced common stock and debt offerings Friday to repay government bailout funds, and some of Wall Street's largest investment banks stand to profit from underwriting the transactions.

In SunTrust's $1 billion-stock offering, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), along with SunTrust's own investment banking affiliate, could collect roughly $30 million in fees from their work on the deal, according to data from Freeman & Co., a financial services consultancy.

Freeman estimated KeyCorp's $625 million stock offering could bring in about $19 million in fees, divided between Morgan Stanley, J.P. Morgan Chase & Co. (JPM) and KeyCorp's investment banking subsidiary, KeyBanc Capital Markets.

The projected data, based on the standard payment of 3% in underwriting fees, underscores the investment banks' ability to play a key role in the recovery of damaged rivals and, at the same time, profit from their recapitalization.

SunTrust and KeyCorp disclosed their plans after the U.S. Federal Reserve said it completed a second round of stress tests on 19 of the largest U.S. banks, several of whom announced plans to boost dividends or buy back their shares. KeyCorp and SunTrust need to pay back funds from the U.S. Treasury Department's Troubled Asset Relief Program before they can pursue such measures.

Earlier Friday, Goldman Sachs said it will redeem preferred shares held by Warren Buffett's Berkshire Hathaway (BRKA, BRKB), including a one-time preferred dividend of $1.64 billion. J.P. Morgan increased its dividend payout to a 25-cent quarterly payout, up from 5 cents.

Morgan Stanley said it's comfortable with its capital position and is focused on reinvesting in its businesses and purchasing the rest of the Morgan Stanley Smith Barney brokerage joint venture.

But for Morgan Stanley, its work on both deals is an opportunity for the firm to build on its strong global equity underwriting performance in 2010. Last year, the investment bank claimed the coveted top ranking, thanks to its role in several government-sponsored transactions such as the initial public offering of General Motors Co. (GM) as well as large deals including Bank of America Corp.'s (BAC) sale of a large chunk of its stake in BlackRock Inc. (BLK).

Year-to-date, Morgan Stanley has a 6.1% global market share within equity capital markets, good enough for a sixth place ranking among financial institutions, according to data provider Dealogic. The firm has served as an underwriter on 54 transactions, including initial public offerings and secondary offerings, valued at $10.7 billion. Within the U.S., the firm has a 7.8% market share so far in 2011.

Financial-company issues have bolstered Morgan Stanley in the past. In the second quarter of 2009, Morgan Stanley's former chief financial officer, Colm Kelleher, said the firm was "a leader in helping financial institutions recapitalize, including equity capital raises for US Bancorp (USB), State Street Corp. (STT), and SunTrust."

J.P. Morgan also benefited from underwriting a slew of capital and debt raises by banks large and small as the financial services industry recovered from heavy losses following the financial crisis. The firm is now ranked seventh globally within equity capital markets, just behind Morgan Stanley. J.P. Morgan has worked on 64 deals valued at $9.7 billion, according to Dealogic.

But both firms have some work to do to catch Goldman Sachs. Wall Street's most profitable investment bank is ranked first year-to-date, serving as a bookrunner on 49 deals valued at $19.8 billion. It has an 11.3% market share globally and a 17.9% share in the U.S.

Representatives for Morgan Stanley and Goldman Sachs declined to comment for this story. J.P. Morgan didn't immediately respond to a request for comment.

Shares of Goldman Sachs recently traded up 2.7% at $159.92. Morgan Stanley was down three cents at $27.42, while J.P. Morgan rose 2.3% to $45.59.

-By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com

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