VOL. 124 | NO. 92 | Tuesday, May 12, 2009
Bank Stock Offerings Weigh on Financial Shares
By SARA LEPRO | AP Business Writer
PAYBACK TIME: U.S. Bancorp, Capital One Financial Corp. and BB&T Corp. have all announced common stock offerings to help repay preferred stock investments the government made as part of the U.S. Treasury Department’s Capital Purchase Plan. Shown here is a Capital One Bank branch in New York. -- AP PHOTO/MARK LENNIHAN
NEW YORK (AP) – KeyCorp, which is among 10 major U.S. banks ordered by the government to raise more capital as a buffer against future losses, joined several other banks Monday in announcing public stock offerings.
The offerings put pressure on financial shares, but underscore the improving conditions in the capital markets and the increasing demand for bank stocks, which have skyrocketed in the wake of the market’s massive two-month rally.
Three banks that have received a clean bill of health from the government – U.S. Bancorp, Capital One Financial Corp. and BB&T Corp. – reported that proceeds from their common stock offerings would go toward repaying federal bailout money received last fall. The repayment of the funds is contingent on government approval, the banks said.
Banks that received money under the U.S. Treasury’s TARP Capital Purchase Plan have become subject to increased government scrutiny, as well as limitations on executive pay. A number of banks, including JPMorgan Chase & Co. and American Express Co., have expressed their desire to return the funds as soon as possible.
“As capital markets are now open and banks are raising common equity, our concerns are partially mitigated,” wrote Friedman, Billings, Ramsey & Co. analyst Paul Miller in a note to clients Monday. As such, he and a team of FBR analysts raised their price targets on 17 banks “to reflect less dilution risk, stronger capital levels and easier access to capital.”
Cleveland-based KeyCorp said it will sell up to $750 million of its common shares. The bank must increase its capital levels by $1.8 billion to satisfy the findings of the government’s stress tests, the results of which were announced late last week.
The tests were designed to determine which of the nation’s 19 largest banks might need more capital to cover rising loan losses if the economy worsened.
KeyCorp shares fell 34 cents, or 4.9 percent, to $6.63 in Monday trading.
U.S. Bancorp, Capital One and BB&T were among the nine banks deemed to have sufficient capital to withstand a deeper recession. Ten banks, including Bank of America Corp. and Citigroup Inc., must raise $75 billion in new capital as a backstop against possible future losses.
Minneapolis-based U.S. Bancorp, which received a $6.6 billion investment from the government, said it will sell $2.5 billion of its common stock. The bank may also offer medium-term notes.
Virginia-based Capital One, which received $3.55 billion from the government, announced plans to sell up to 64.4 million shares at $27.75 a share for gross proceeds of $1.79 billion. The offering price is an 11.5 percent discount to the stock’s Friday closing price of $31.34.
Southeast regional bank BB&T said it will sell $1.5 billion in common stock, and will also cut its dividend by 68 percent to 15 cents to save $725 million annually. The North Carolina-based bank received a $3.1 billion investment from the government last fall. BB&T shares fell $1.22, or 4.6 percent, to $25.11.
One of the goals of the stress tests – a centerpiece of the Obama administration’s plan to prop up the financial system – was to restore investors’ confidence in banks, providing evidence that not all are troubled. And analysts believe the tests largely achieved this goal.
“While the stress test results don’t change the view that loan losses are still going to increase in the majority loan categories at the majority of banks, a shored up capital position should make this more palatable, as well as reduce systematic risk, a factor that weighed heavily on financials late last year and early this year,” wrote Barclays Capital analyst Jason Goldberg in a research note.
JPMorgan Chase, Goldman Sachs Group Inc., MetLife Inc., American Express, and trust banks State Street Corp. and Bank of New York Mellon Corp. were among the other banks the government did not ask to raise more capital.
Among banks that do need to raise money, Bank of America needs $33.9 billion, Wells Fargo & Co. $13.7 billion, GMAC LLC $11.5 billion, Citigroup $5.5 billion and Morgan Stanley $1.8 billion. Regional banks Regions Financial Corp., SunTrust Banks Inc., Fifth Third Bancorp and PNC Financial Services Group Inc. also need to raise funds.
The banks will have one month to devise a capital-raising plan and six months to implement it.
Charlotte, N.C.-based Bank of America said it will raise capital through asset sales, earnings in the coming quarters and from private investors. The bank said asset sales could help raise $10 billion, while another $17 billion will likely be raised through the issuance of common stock, including through converting at less than face value some preferred shares held by private investors.
Morgan Stanley on Friday offered 167.9 million common shares for $24 each for proceeds of $4 billion. The company also priced an offering of $4 billion in bonds. Wells Fargo, meanwhile, raised $8.6 billion in a stock offering of 392.2 million shares.
Together, the 19 firms that took the test hold two-thirds of the assets and half the loans in the U.S. banking system.
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.