Citi and BofA may need more capital after stress tests
NEW YORK (Reuters) - U.S. regulators are talking to Citigroup Inc about its capital levels after stress testing the bank, people familiar with the matter said, while the Wall Street Journal reported that Bank of America Corp may need billions in fresh capital.
The reports sent Bank of America and Citigroup shares down as much as 10 percent and 5 percent respectively before both pared losses, and hit global stocks, already shaken by fears about the spread of swine flu.
Financial stocks more broadly were jarred by analysts' reports that other banks may also need to raise funds.
Wells Fargo & Co could need more capital, according to a client note from Deutsche Bank analysts, and regional banks may also need to bolster capital levels, Oppenheimer & Co analysts said in a report. The KBW Banks Index slid as much as 4 percent in morning trading before recovering most of its loss, and was down 1.7 percent at late morning.
"The U.S. stress tests are absolutely critical to where we are going," said Huw van Steenis, Morgan Stanley banking analyst in London. "Not only are they crucial for share prices to work out how much dilution or not may come through, but the tests have also been introduced to try to improve the credibility of the system."
Both Bank of America and Citigroup, whose officials are objecting to the preliminary findings of the tests, plan to respond with detailed rebuttals, sources told the Journal, adding Bank of America's appeal was expected by Tuesday.
Citigroup may be able to raise any capital it needs by changing the terms of its planned exchange of preferred shares for common, or adding to the exchange, people familiar with the matter told Reuters.
NO COMMENT
A Bank of America spokesman was not immediately available for comment. Citigroup declined to comment. A Federal Reserve spokeswoman also declined to comment.
It is likely that Citigroup and Bank of America are not the only banks targeted by the Federal Reserve, the Journal said.
Deutsche Bank analyst Matt O'Connor wrote in a note to clients dated April 27 that Wells Fargo & Co, along with Bank of America and eight other U.S. banks, may need to raise more capital based on his own approximation of a stress test of the banks' tangible common equity to risk-adjusted assets.
The Fed said last week the tests conducted at major banks were aimed at ensuring the institutions have enough capital in reserve to continue to lend in potentially bleaker conditions, and are not a measure of banks' current solvency.
Bank of America shares were down 4.5 percent at $8.52 and Citigroup shares fell 4.2 percent to $2.94 in morning trading. The cost of insuring Citigroup debt with credit default swaps rose by 70 basis points to 615 basis points, while Bank of America's swaps widened by 25 basis points to 325 basis points, according to data from Phoenix Partners Group.
STRESS TEST DETAILS AWAITED
The government broadly outlined how it stress-tested the country's top 19 banks on Friday, but it disappointed investors who were looking for more details on the stringency of the tests.
The Fed has said most of the 19 banks have capital levels well in excess of the amounts required to be deemed well capitalized. However, it said heavy losses had lowered capital and choked off lending.
The results of the stress tests will be released during the week of May 4, and regulators hope that by outlining the methodology, investors will have a way to gauge the results.
Some banks with too thin a capital cushion will have six months to find private funds; others may need to accept an immediate infusion of taxpayer money.
Regional banks may be next to undergo scrutiny of their capital strength, according to analysts Terry McEvoy and Erik Zwick at Oppenheimer & Co. Higher exposure to commercial real estate and lower earnings power over the next two years indicate smaller banks may have a greater need to raise capital than the 19 banks in the government's stress test, the analysts wrote in a report on Tuesday.
The 19 banks tested, which include JPMorgan Chase & Co and Wells Fargo, hold two-thirds of the assets and more than half of the loans in the U.S. banking system.
(Reporting by Ajay Kamalakaran in Bangalore; Additional reporting by Mark Felsenthal in Washington, Victoria Howley, Sitaraman Shankar and Steve Slater in London; Editing by Dan Lalor, John Stonestreet, John Wallace and Brian Moss)