After Stress Tests, Big Banks Face Decision On Repaying TARP
March 25 2009 - 3:54PM
Dow Jones News
Several of the nation's biggest banks might begin the process of
repaying government bailout money next month after the U.S.
Treasury Department completes stress tests of their balance
sheets.
Most analysts expect the banks that received the initial round
of funding from the Troubled Asset Relief Program, or TARP, will
pass the tests. They might then begin the process of formally
discussing with regulators paying back the money.
Those banks - which include Citigroup Inc. (C), JPMorgan Chase
& Co. (JPM), Bank of America Corp. (BAC), Goldman Sachs Group
Inc. (GS), and Morgan Stanley (MS) - have signaled they want to get
out from under government restrictions that come along with the
money. Last week, the House of Representatives passed a bill that
would heavily tax bonuses paid to workers at companies that took
more than $5 billion in TARP money; a similar Senate bill has been
delayed.
There's also concern that regulators might not want banks to
repay their government investments too quickly because of the
uncertain economic environment. Repaying might also cause questions
about the condition of those banks that delay paying the government
back.
Here's what the top U.S. banks have said about repaying TARP,
and what financial headwinds they face:
- JPMorgan Chase is looking into ways to return the government's
$25 billion investment within the next three to eight months, a
person familiar with the matter said. The company is considered to
be in the best shape among rival commercial banks, and Chief
Executive Jamie Dimon said on March 11 that the bank was profitable
during the first two months of the year.
The bank cut its dividend 87% last month to 5 cents a share, the
first time since 1990 the company has made a cut. That will save $5
billion a year, and could be used to help pay off government funds.
The company's tangible common equity ratio is at 3.86% Tangible
common equity, a conservative measure of capital, will be measured
in the upcoming stress test.
- Bank of America CEO Ken Lewis said Tuesday that his company
would like to start repaying its $45 billion in government aid next
month; the Treasury also agreed to backstop as much as $120 billion
of the bank's assets. Paying off the government investment could
take a while.
Bank of America holds the lowest tangible common equity ratio of
any large bank, ringing in at 2.54%. The bank's earnings are
vulnerable to rising unemployment, as well as troubles in the
commercial real estate market. Bank of America nonetheless expects
to take in "close to $50 billion in pre-tax, pre-provision
earnings" this year - that's before subtracting losses from bad
loans - which means the bank should quickly recover once the
economy bottoms. The question is when that will happen. Moody's on
Wednesday lowered its credit ratings on Bank of America, citing,
among other things, an increasing "probability that systemic
support will be needed."
- Citigroup is the most hard-hit bank since the financial crisis
began, and currently owes the government $45 billion. The
government also allocated more than $300 billion as a loan-loss
backstop for the bank. The bank said there is no current need for
capital after the conversion of a large chunk of preferred stock
into common shares. The bank will have a tangible capital ratio of
3.98% once the deal is completed, up from 1.55%.
CEO Vikram Pandit said earlier this month that the bank is also
off to a strong start this year. However, like other banks, there
remain concerns about consumers defaulting on other debt such as
credit-card debt.
- Wells Fargo & CO. (WFC) opposed receiving the government's
TARP funds perhaps more than any other bank. Six months after the
U.S. government forced Wells to accept $25 billion in government
aid, however, the San Francisco bank has far less room to
complain.
Wells Fargo purchased crumbling rival Wachovia Corp. and dropped
its tangible common equity ratio to 2.82% - less than any large
bank except Bank of America - after taking billions of dollars in
up-front losses from Wachovia's troubled loans. The bank will
likely need to prove to regulators that losses from its piles of
consumer loans have peaked before the bank will be able to repay
TARP. Wells Fargo may have traded a quick return to independence
for the opportunity to become a coast-to-coast financial
superstore.
- PNC Financial Services Group Inc. (PNC) may very well have the
clearest path of any large bank for repaying its $7.6 billion
government aid. The Pittsburgh-based regional bank accepted its
government aid to purchase rival National City Corp.
But growing troubles among PNC's $100 billion in construction
and real estate loans have pushed its tangible common equity ratio
to 2.92%, and could leave the company vulnerable should the U.S.
recession grow worse than expected. Like other large banks, to
rebuild capital and repay the government more quickly, PNC recently
slashed its dividend by 85%.
- Goldman Sachs looks set to become the first financial company
to return TARP money to the government. It could repay the $10
billion it received by late April, according to a person briefed on
the matter. The timing would most likely be after Goldman passes
the stress test and reports first-quarter results.
It is widely expected that Goldman will pass the government's
stress test, and the company has already said it is on track to
post a profit this quarter. Goldman also wants to return the money
quickly because it has the means to do so, with more than $100
billion in cash sitting on its balance sheet.
- Morgan Stanley CEO John Mack said in February he wants to
return the $10 billion of TARP funds by the end of 2009. Morgan
Stanley, like Goldman, is also considered to be in a strong
position at the start of the year. Beyond a rebounding stock,
Morgan Stanley has done well during the first two months of the
quarter, Mack has stated.
As for its capital position, the bank last year raised $9
billion by selling a 21% stake to Japan's Mitsubishi UFJ Financial
Group Inc. (MTU). Both banks are in the midst of developing
cross-selling opportunities, which might include combining
brokerage operations in Japan.
-By Joe Bel Bruno, Dow Jones Newswires; 201-938-4047;
joe.belbruno@dowjones.com
-By Marshall Eckblad, Dow Jones Newswires; 201-938-4306;
marshall.eckblad@dowjones.com