Regionals Get a Clue on Capital Ratios

NEW YORK (TheStreet) -- The recent equity raise by PNC Financial Services(PNC) as part of its plan to repay bailout funds potentially provides a valuable clue about what capital standards regulators will eventually adopt.

PNC is the highest profile name to pay its Troubled Asset Relief Program, or TARP, tab of late as the Pittsburgh-based company disclosed its arrangement to make good on nearly $8 billion in bailout funds last week. PNC was the largest of the remaining banks with outstanding preferred shares owned by the U.S. Treasury after Bank of America(BAC), Wells Fargo(WFC) and Citigroup(C) each used large equity offerings to repay funds in December.

What's interesting about PNC's plan is that, likely on the recommendation of regulators, the company cushioned itself with the $3 billion equity raise. This was in addition to announcing a number of other steps to improve liquidity, including an agreement to divest its global fund processing unit to Bank of New York Mellon(BK) for $2.3 billion, and plans to sell between $1.5 billion and $2 billion worth of senior notes.

Factoring in these moves, PNC says its Tier 1 common equity ratio would have stood at 8% as of Dec. 31 on a pro forma basis, compared to the 6% level it reported on Jan. 21 when it released its fourth-quarter results.

Banks of ranging sizes continue to look to the capital markets to provide fresh ammunition for their coffers, with many doing it primarily to repay bailout funds. But the actions of PNC this week sent a message to other regional banks about what capital ratios could be targeted by regulators in the future.

TARP paybacks were few and far between in the final three months of 2009 until the flurry of big banks that took the plunge in December, and the standards for the money-center names wouldn't be expected to necessarily apply to the majority of the industry anyway. PNC's TARP payback deal, however, may represent a step by regulators toward setting the 8% ratio up as a benchmark of sorts for the remaining regionals and other smaller institutions.

In general, the higher the ratio favored by regulators, more banks will likely have to sell additional stock to shore up their balance sheets. Lifting the standard in relation to historical levels also impacts ongoing expectations of profitability for the group, as the sector would have less capital available, on a relative basis, to put to work than it did in the past. It could also affect M&A activity, and other capital-intensive initiatives, like expansion and infrastructure investment.