Stressed Banks Might Need More Common Equity: Analyst
March 02 2009 - 9:57AM
Dow Jones News
With Citigroup Inc.'s (C) dramatic effort to boost its tangible
common equity Friday, this once-obscure measure of a bank's capital
is now clearly in the spotlight.
By one analyst's stress test scenario, some other banks also
don't have enough tangible common equity.
Tangible common equity measures the portion of a bank's assets
that common shareholders actually own after subtracting debt, and
excluding intangible assets like brand names and goodwill. U.S.
regulators have begun "stress testing" the 19 largest banks by
assets; it isn't known whether they will be looking at tangible
common equity in those tests.
But Barclays analyst Jason Goldberg, making the interesting but
not inevitable assumption that tangible common equity would be a
consideration in the government's stress test, constructed his own
stress test that assesses the tangible common equity of 21 banks,
12 of which are on the list to be tested by the government.
"While nowhere did the Treasury mention the word tangible, in
recent testimony we have heard the term 'high quality' capital
several times, so we went with tangible," wrote Goldberg.
Under the stress test scenario, Goldberg said banks need Tier 1
Capital of more than 6% to be considered well capitalized by the
regulators. He believes that regulators will want at least half of
that in tangible common equity. "We assume if Treasury wants the
banks to continue to lend in this scenario, a buffer to 3% is
required, so we went with 4%," he wrote.
With respect to tangible common equity and risk weighted assets,
looking at fourth quarter 2010 bank results under a more adverse
scenario, Bank of America Corp. (BAC), U.S. Bancorp (USB), PNC
Financial Services Group Inc. (PNC), Wells Fargo & Co. (WFC),
Fifth Third Bancorp (FITB), BB&T Corp. (BBT), Regions Financial
Corp. (RF), and Citigroup (C) fell below the 4% line. However, this
was before Citi's announcement Friday.
Under Goldberg's stress test model, U.S. Bancorp, PNC, and Wells
Fargo were able to rectify the shortfall with dividend cuts.
Banks that had adequate tangible common equity ratios include
JPMorgan Chase & Co. (JPM), State Street Corp. (STT) and
SunTrust Banks Inc.(STI), with a tangible common equity of 4.9%,
10% and 4.1%, respectively. KeyCorp screened "better than would
have been expected," with a 4.1% tangible common equity, Goldberg
noted.
In Goldberg's report, released last week, he wrote, "after an
initial, albeit rushed cut, most banks under coverage appear to
pass the stress test," he wrote.
The government has started stress testing the banks, which
include Goldman Sachs Group Inc. (GS), Bank of America Corp. and
Capital One Financial Corp. (COF).
Banks are aware that tangible common equity is becoming more
important. Citi announced Friday the U.S. Treasury will convert up
to $25 billion of its preferred stock holdings into common stock,
and touted that its tangible common equity ratio would be
boosted.
Assuming maximum conversion, Citi's tangible common equity ratio
would be in the area of 4.3%, Goldberg wrote in a research note;
and as a percent of risk-weighted assets would be 8%, up from
3%.
Friday, Citigroup Chief Executive Officer Vikram Pandit said,
"This securities exchange has one goal - to increase our tangible
common equity. While we believe Tier 1 capital remains the most
important measure of the financial strength of banks, we recognize
that the markets also view tangible common equity as an important
measure.
Looking at Goldberg's more adverse scenario, but using
fourth-quarter 2008 earnings, some banks faired better. For
example, U.S. Bancorp.'s tangible common equity was 3.5% with 2008
results compared to 1.2% using 2010 numbers. BB&T crossed the
4% line when looking at 2008 numbers with 6.3% compared to 3.4%
when examining 2010 results.
-By Jessica Papini, Dow Jones Newswires; 201-938-2437;
jessica.papini@dowjones.com