By Elinor Comlay and Steve Slater
NEW YORK/LONDON (Reuters) - Morgan Stanley and Wells Fargo rushed to sell more than $15.5 billion of stock and bonds after the U.S. government said top financial companies need to fill a $75 billion capital hole, while two European banks said bad debts are rising.
U.S. banks are racing to tap equity markets that have soared since early March, and may pull back soon, analysts said. Bank of America Corp said it plans to sell 1.25 billion shares to help meet what the government deemed a $33.9 billion capital shortfall.
"You have this opportunity to sell equity now, and if you don't, and share prices fall, people will criticize you," said Smith Asset Management Chief Executive William Smith.
U.S. regulators told 10 of the biggest U.S. banks late on Thursday to raise a total of $74.6 billion, which was less than investors once feared and helped lift European and U.S. bank shares on Friday.
The seemingly manageable size of the shortfall found by regulators after "stress tests" on the nation's 19 biggest banks drew applause from investors who believe the worst is over. Yet the tests also evoked skepticism among those who contend the tests were not rigorous enough.
Morgan Stanley sold a total of $4.03 billion in stock Friday morning, including overallotment shares, while Wells Fargo & Co sold $7.5 billion. Both deals were larger than expected, but came at discounts of more than 11 percent to their Thursday closing prices.
Of the 19 banks tested, 10 need new capital. Auto and home lender GMAC LLC was deemed to have an $11.5 billion shortfall, by far the largest deficiency relative to its size.
FINITE DEMAND
Whether the market goes up or down in the near term, investor demand for bank stocks is finite, and it makes sense to try to issue first, said Brad Hintz, analyst at Sanford C. Bernstein.
"There are a whole lot of hungry banks stepping up to the banquet table. They know if they're not first in line, there might not be any shrimp left on the table for them," Hintz said.
In addition to offering shares, Bank of America plans to sell assets to satisfy regulators. The bank is better able to raise capital than the government estimated in its tests, Chief Executive Kenneth Lewis told CNBC on Friday.
Lewis said the rise in Bank of America shares in premarket trading reflected "clarity and certainty" brought about by the release of the stress test results.
Bank of America shares were up 4.1 percent in early afternoon trading to $14.06, despite the impending dilution of current shareholdings from a stock sale.
Morgan Stanley also sold $4 billion of senior notes on Friday, split evenly between 5-year and 10-year debt, as a step toward repaying $10 billion of capital received last fall under the Treasury's Troubled Asset Relief Program.
The combined debt and equity sales generated more than $8 billion for Morgan Stanley.
More broadly, U.S. bank shares were higher. Morgan Stanley edging up 1.2 percent to $27.46 after it said it had sold 146 million shares at $24.00 each plus another 21.9 million shares to meet extra demand.
Wells Fargo shares rose 6.6 percent to $26.40 after the bank said it sold 341 million shares at $22.00 each.
The biggest gainer Friday was Cincinnati regional bank Fifth Third Bancorp, which soared 60 percent to $8.56 a share, its highest price in four months.
Morgan Stanley, Goldman Sachs Group Inc and JPMorgan Chase & Co all hope to repay their TARP money soon, partly to escape pay restrictions attached to the funds. The Treasury will soon release pay guidelines for major banks.
Bank of America's Lewis was upbeat on the economy, saying he still expects to see signs of a turnaround in the second half of the year.
Goldman CEO Lloyd Blankfein said at the bank's annual meeting on Friday that the end to the crisis "is in sight" and markets are "cheerier.
BAD DEBTS
But banks globally remain under pressure as rising unemployment and sinking house prices drive loan losses.
In Europe, top banks continued to show the impact of the recession as companies and consumers are increasingly running into trouble.
Royal Bank of Scotland, now 70 percent state-owned, fell to a loss in the first three months of 2009 after bad debts quadrupled to 2.9 billion pounds and it took a 2.1 billion pound writedown on risky assets.
"(We expect) a slowdown in financial market activity compared with the very buoyant conditions seen in Q1," Chief Executive Stephen Hester said.
Meanwhile, Germany's Commerzbank reported an 861 million euro ($1.2 billion) loss for the quarter, after a 1.2 billion euro charge from the investment bank and a 54 million euro charge from its commercial real estate unit.
The Frankfurt-based bank, which has been hit by writedowns on debt products related to the U.S. residential mortgage market, unveiled bullish targets as part of a planned overhaul, which included a reshuffle of its board.
The DJ Stoxx Banking sector rose 2.2 percent to 182.2. The index has doubled in the past two months.
(Additional reporting by Joe Giannone in New York, Karey Wutkowski and David Lawder in Washington; Writing by Dan Lalor; Editing by Greg Mahlich, John Wallace and Steve Orlofsky)
($1=0.6666 pounds)
