Tuesday, April 28, 2009

Compilation - Notes on Stress Test

Below are brief quotes from various articles about the banks currently undergoing the "stress test". In general, it seems pretty hit-or-miss.

IN GENERAL

“At least one firm – under the [bank] stress test assumptions – will require more capital,” the source said.

April 24 – in Money - Traders turned optimistic after the government said that most of the 19 big banks passed the "stress test" with enough capital and that none would be allowed to fail should the recession deepen. Better-than-expected earnings from Ford, American Express and Microsoft also fueled the rally.


NEW YORK (AP) — The head of the Federal Deposit Insurance Corp. on Monday linked the results of recent "stress tests" on the nation's 19 largest banks to the government's belief that it won't have to ask Congress for additional bailout funds in the immediate future.FDIC Chairman Sheila Bair said she didn't want to reveal the test results before they are made public but added, "I do believe the current resources of the Treasury will be sufficient. For now, we have the resources that we need."The banks received the test results last week and have until Tuesday to appeal any of the government's findings. The government is expected to release the results on May 4.Before the government shared the results with banks on Friday, Treasury Secretary Timothy Geithner last week told a congressional panel overseeing the federal bailouts that "the vast majority" of banks have more capital than they need.There is about $109 billion remaining in the government's $700 billion financial rescue fund, which has been used to buy preferred shares in banks to get them lending again, and to bail out American International Group Inc., General Motors Corp. and Chrysler LLC. The Treasury Department has said it also expects to get $25 billion in repayments from banks over the next year.

April 27 (Bloomberg) -- Japanese and Australian
stock futures climbed after the U.S. said most banks being given stress tests have adequate capital.

WASHINGTON (MarketWatch) April 28 - At least 17 of 30 regional banks that have less than $100 billion in assets may need to raise additional government or private capital, according to a report by Oppenheimer & Co. Inc. on Tuesday. According to the report, a conversion of government and private shares to common shares at most of the 30 banks would, on average, bring their capital levels to levels that bank regulators would consider satisfactory based on stress test scenarios released by bank regulators. However, it is unclear whether these banks are voluntarily conducting government stress tests on their financials. These banks are somewhat smaller in size than the 19 largest financial institutions bank regulators are examining with stress test results expected for those banks on or around May 4.

As for sorting out which banks are still at risk consider the following from
Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows:

None currently merit a rating of B+ or better, a level that we believe would generally correspond to capital levels well in excess of needed amounts.

Only three, representing 6 percent of the assets of the 19 — have a rating of B- or B, — considered “good.” They are Bank of New York Mellon, Capital One and State Street.

We consider eight institutions, representing 63 percent of the assets, to be at risk of failure. They are JPMorgan Chase, Citibank, Wells Fargo, SunTrust, Goldman Sachs, HSBC America, National City and Countywide Bank.

Notice the number of "healthy" banks (Goldman, JP Morgan) on that list. Weiss says hefty ongoing exposure to derivative risk is part of the problem, and concludes both the stress tests and their results could be "very misleading."

Company/ Assets $(Billions)/ TARP Funding

1. JP Morgan Chase/ 2,175/ 25

Bair also defended the Treasury Department's $1 trillion plan to get toxic mortgage investments off banks' books, saying it's the "appropriate structure to address troubled assets."Earlier this month, JPMorgan Chase & Co. said it wouldn't participate in the program because it did not need to. Bair said a bank could opt out of the broader bailout program only in consultation with the government. "Some banks have rosier views of their capital positions that what they actually are," she said.


As for sorting out which banks are still at risk consider the following from
Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows:We consider eight institutions, representing 63 percent of the assets, to be at risk of failure. They are JPMorgan Chase, Citibank, Wells Fargo, SunTrust, Goldman Sachs, HSBC America, National City and Countywide Bank. Notice the number of "healthy" banks (Goldman, JP Morgan) on that list. Weiss says hefty ongoing exposure to derivative risk is part of the problem, and concludes both the stress tests and their results could be "very misleading."

By Andrew Ross Sorkin – April 20 -Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market.
Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers. But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second. JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped);

2. Citigroup/ 1,947/ 45

The Wall Street Journal reported that both banking giants were told to raise more capital, based on early results of the stress test. Executives at both are objecting to the preliminary findings.

April 28 (Reuters) - Citigroup Inc:
* Says cannot comment on stress test until results are announced
* Says regulatory capital base is strong, and as previously announced is
conducting exchange offer to improve tangible common ratios
* Says continues to focus, make progress on reducing assets, reducing expenses
and streamlining business for future profitable growth

April 23 - Vikram Pandit, the chief executive of Citigroup, the third-largest U.S. bank and a recipient of $45 billion in emergency government funds, pledged on Tuesday to repay "every dollar" of government capital. He sought to counter speculation he would be replaced if Citi needs another bailout with a vow to shareholders to see the bank through its troubles.

As for sorting out which banks are still at risk consider the following from Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows:
We consider eight institutions, representing 63 percent of the assets, to be at risk of failure. They are JPMorgan Chase, Citibank, Wells Fargo, SunTrust, Goldman Sachs, HSBC America, National City and Countywide Bank.

By Andrew Ross Sorkin – April 20 -Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers. But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second. With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); Citigroup pulled the same trick.

During an
Intelligent Investing panel discussion, Vincent Farrell Jr., chief investment officer of Soleil Securities and a member of the Forbes Investor Team, forecasted that, depending on how the government administers its "stress test" of the major banks, two to four public financial companies could have to seek extra capital.
Under the most generous terms of the test,
Citigroup ( C - news - people ) and Fifth Third Bank Bancorp will need to raise capital after the stress test results are revealed, says Farrell.

3. Bank of America (w/out ML)/ 1,822/ 25

The Wall Street Journal reported that both banking giants were told to raise more capital, based on early results of the stress test. Executives at both are objecting to the preliminary findings.
Bank of America Corp. needs $60 billion to $70 billion of capital, according to Freidman, Billings, Ramsey Group Inc. analyst Paul Miller, who cited stress tests performed by his firm. Bank of America should consider converting its preferred shares to common stock, including $27 billion in private hands “as soon as possible,” Miller wrote in a note to clients today. Miller said his firm’s versions of the stress tests were “somewhat tougher” than those performed by U.S. regulators.

By Andrew Ross Sorkin – April 20 -Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market.
Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers. But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”
Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at
Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

4. Well Fargo/ 1,310/ 25

As for sorting out which banks are still at risk consider the following from
Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows:

We consider eight institutions, representing 63 percent of the assets, to be at risk of failure. They are JPMorgan Chase, Citibank, Wells Fargo, SunTrust, Goldman Sachs, HSBC America, National City and Countywide Bank

5. Goldman Sachs/ 885/ 10

As for sorting out which banks are still at risk consider the following from
Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows:
We consider eight institutions, representing 63 percent of the assets, to be at risk of failure. They are JPMorgan Chase, Citibank, Wells Fargo, SunTrust, Goldman Sachs, HSBC America, National City and Countywide Bank. Notice the number of "healthy" banks (Goldman, JP Morgan) on that list. Weiss says hefty ongoing exposure to derivative risk is part of the problem, and concludes both the stress tests and their results could be "very misleading."

By Andrew Ross Sorkin – April 20 -Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market.
Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers. But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second. With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month);

6. Morgan Stanley/ 659/ 10
7. MetLife/ 502/ 0
8. PNC Financial/ 291/ 7.6

During an
Intelligent Investing panel discussion, Vincent Farrell Jr., chief investment officer of Soleil Securities and a member of the Forbes Investor Team, forecasted that, depending on how the government administers its "stress test" of the major banks, two to four public financial companies could have to seek extra capital.

If more stringent terms are applied, PNC and Bank of New York might have to raise funds as well. The issue is whether or not banks will be able to use existing reserves in order to demonstrate a 3.0%
capital ratio under dire economic circumstances.

9. U.S. Bancorp/ 267/ 6.6
10. Bank of New York Mellon/ 238/ 3.0

Bank of New York Mellon Corp (
BK.N) CEO Robert Kelly said on Monday that he thinks most U.S. banks are healthier than people may realize and urged the government to let the public know results of its stress test. "I don't know the results for the other banks but I have a suspicion that the average bank is healthier than most people realize," Kelly told a session at the Milken Institute's Global Conference.

As for sorting out which banks are still at risk consider the following from
Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows only three, representing 6 percent of the assets of the 19 — have a rating of B- or B, — considered “good.” They are Bank of New York Mellon, Capital One and State Street.

During an
Intelligent Investing panel discussion, Vincent Farrell Jr., chief investment officer of Soleil Securities and a member of the Forbes Investor Team, forecasted that, depending on how the government administers its "stress test" of the major banks, two to four public financial companies could have to seek extra capital.

If more stringent terms are applied, PNC and Bank of New York might have to raise funds as well. The issue is whether or not banks will be able to use existing reserves in order to demonstrate a 3.0%
capital ratio under dire economic circumstances.

11. GMAC/ 189/ 0

No comment on this one!

12. SunTrust/ 189/ 4.9

April 28 - In looking to the future, Wells said “we know economic recovery is out there,” but he added that the bank did not know when this cycle would end. So he is fully expecting that “2009 will be another difficult year.” On a more positive note, Wells said that he believes that SunTrust “will emerge from this period in a strong competitive position.” He reinforced the theme of the bank’s new marketing campaign: “Live Solid. Bank Solid.” During the question-and-answer period, a shareholder asked Wells about the federal stress test on banks and whether SunTrust would need to receive more capital from the federal government as other major banks are expected to get. It got $4.85 billion in U.S. Treasury Troubled Asset Relief Program funds in 2008. “Unfortunately, the stress test is a regulatory issue,” Wells said explaining that he is restricted on making any public comments on that. “I find it interesting that others can.”

Bernstein Research told clients that among the mid-cap banks it covers that were subject to the test BB&T Corp. (BBT) is in the best position. However, it listed Regions, Fifth Third Bancorp (FITB) and SunTrust Banks Inc. (STI) as "likely to be in need of either incremental capital or conversion" of capital from the Troubled Assets Relief Program to the Capital Assistance Program.

BMO Capital is also concerned about KeyCorp, Regions, Fifth Third and SunTrust, cautioning that banks "with large exposure to commercial real estate in the Midwest, the Southeast, and Florida may be the most heavily scrutinized as these loans are currently considered especially weak." BMO noted KeyCorp, Regions, Fifth Third and SunTrust "have significant exposure to these areas."

13. State Street/ 177/ 2.0

As for sorting out which banks are still at risk consider the following from
Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows only three, representing 6 percent of the assets of the 19 — have a rating of B- or B, — considered “good.” They are Bank of New York Mellon, Capital One and State Street.

14. Capital One Financial Corp/ 166/ 3.5

Bernstein sees Capital One and KeyCorp as falling "somewhere in the middle, with the severity of the loss assumptions being the determining factor as to whether they will be required to raise incremental capital."

As for sorting out which banks are still at risk consider the following from
Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows only three, representing 6 percent of the assets of the 19 — have a rating of B- or B, — considered “good.” They are Bank of New York Mellon, Capital One and State Street.

15. BB & T/ 152/ 3.1

Bernstein Research told clients that among the mid-cap banks it covers that were subject to the test BB&T Corp. (BBT) is in the best position. However, it listed Regions, Fifth Third Bancorp (FITB) and SunTrust Banks Inc. (STI) as "likely to be in need of either incremental capital or conversion" of capital from the Troubled Assets Relief Program to the Capital Assistance Program.

16. Regions Financial Corp/ 146/ 3.5

Bernstein Research told clients that among the mid-cap banks it covers that were subject to the test BB&T Corp. (BBT) is in the best position. However, it listed Regions, Fifth Third Bancorp (FITB) and SunTrust Banks Inc. (STI) as "likely to be in need of either incremental capital or conversion" of capital from the Troubled Assets Relief Program to the Capital Assistance Program.

BMO Capital is also concerned about KeyCorp, Regions, Fifth Third and SunTrust, cautioning that banks "with large exposure to commercial real estate in the Midwest, the Southeast, and Florida may be the most heavily scrutinized as these loans are currently considered especially weak." BMO noted KeyCorp, Regions, Fifth Third and SunTrust "have significant exposure to these areas."

17. American Express/ 126/ 3.4
18. Fifth Third Bancorp/ 120/ 3.4

Bernstein Research told clients that among the mid-cap banks it covers that were subject to the test BB&T Corp. (BBT) is in the best position. However, it listed Regions, Fifth Third Bancorp (FITB) and SunTrust Banks Inc. (STI) as "likely to be in need of either incremental capital or conversion" of capital from the Troubled Assets Relief Program to the Capital Assistance Program.

BMO Capital is also concerned about KeyCorp, Regions, Fifth Third and SunTrust, cautioning that banks "with large exposure to commercial real estate in the Midwest, the Southeast, and Florida may be the most heavily scrutinized as these loans are currently considered especially weak." BMO noted KeyCorp, Regions, Fifth Third and SunTrust "have significant exposure to these areas."

During an
Intelligent Investing panel discussion, Vincent Farrell Jr., chief investment officer of Soleil Securities and a member of the Forbes Investor Team, forecasted that, depending on how the government administers its "stress test" of the major banks, two to four public financial companies could have to seek extra capital. Under the most generous terms of the test, Citigroup ( C - news - people ) and Fifth Third Bank Bancorp will need to raise capital after the stress test results are revealed, says Farrell.

19. KeyCorp/ 105/ 2.5

Bernstein sees Capital One and KeyCorp as falling "somewhere in the middle, with the severity of the loss assumptions being the determining factor as to whether they will be required to raise incremental capital."

BMO Capital is also concerned about KeyCorp, Regions, Fifth Third and SunTrust, cautioning that banks "with large exposure to commercial real estate in the Midwest, the Southeast, and Florida may be the most heavily scrutinized as these loans are currently considered especially weak." BMO noted KeyCorp, Regions, Fifth Third and SunTrust "have significant exposure to these areas."




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