NEW YORK ( TheStreet) -- The former sharks of Wall Street are turning into guppies while conservative lenders like Wells Fargo (WFC), U.S. Bancorp (B), BB&T (BBT), Capital One (COF) and JPMorgan Chase (JPM) may be taking the the reins as the next generation of risk takers in the financial sector.
That's because once conservative banks are issuing paper - called perpetual preferred securities -- that will allow them to grow their balance sheets in coming years, while the titans of Wall Street have to sit on the sidelines.
Banks have issued $8.4 billion in perpetual preferreds in 2012, a near doubling compared with the $4.5 billion of securities issued at this time last year, according to Dealogic, and as they brace for a big redemption of trust preferred securities starting in September, the trend may just be beginning.
Strong second quarter earnings growth from traditional lenders and a drop in first half Wall Street-based earnings to 2008 levels tells part of the story on a quickly shifting balance of power in finance. Still, investors should track the banks that take advantage of low interest rates to issue cheap perpetual preferred securities as a way to discriminate between those positioned to take on risk in coming years and those who will further retrench.The key is that after large cap banks recapitalized during the crisis, the firms that move fastest in an industry-wide race to build new capital may actually be preparing for a lending and growth push, in coming years. Already, recent financial moves made by the likes of Wells Fargo, US Bancorp, Capital One and JPMorgan, among others, signal that traditional mortgage, corporate and consumer lenders are positioning their balance sheets for an increase in lending - think risk - and hopefully earnings growth. Meanwhile, standalone investment banks Goldman Sachs (GS), Morgan Stanley (MS) and deleveraging conglomerates like Bank of America (BAC) and Citigroup (C) appear flat-footed. A divergence in the growth profiles of America's largest banks may soon be seen in how they handle an upcoming refinancing of billions in trust preferred securities that are up for redemption starting in September and going through 2012. Trust preferred securities will stop being counted as Tier 1 common capital in new post- Dodd Frank Act and Basel III regulatory regimes, likely leading banks to redeem high-yielding securities issues - often carrying yields above 7% that reflect mid 2000s interest rate levels. According to an Aug 17 Guggenheim Securities analysis, Bank of America and JPMorgan have over $20 billion of trust preferred securities up for redemption in the next year, followed by $17 billion-plus in redemptions at Wells Fargo. Morgan Stanley and Citigroup also have six and nine TRUPS up for redemption on September 20, respectively, which generally carry 6%-plus yields. The big question is whether banks will look to replace those securities with other forms of hybrid capital -- perpetual preferreds -- that will count as equity by global regulators in coming years, and which may carry lower yields. As trust preferred securities face an upcoming redemption schedule, some banks are replacing them with newly issued perpetual preferred securities - allowed in new regulatory regimes to count for roughly 1.5% of overall Tier 1 common capital - in refinancing's that may push down borrowing costs and increase interest-based earnings. A recent $1.1 billion perpetual preferred offering by JPMorgan carrying a 5.5% yield and similar priced offerings by Wells Fargo, Capital One, BB&T and US Bancorp in recent months illustrate banks building low-yielding capital as billions in trust preferreds come up for redemption. Meanwhile, facing similar opportunities, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America have been notably silent in 2012. In June the Federal Reserve proposed enhanced capital requirements for large banks that exclude most trust preferred shares from regulatory Tier 1 capital. Now, under the Federal Reserve's proposed new capital rules, banks will be able to use noncumulative perpetual preferred for between 1% and 1.5% of their Tier 1 risk-based capital ratios. With recent perpetual preferred financings in the 5% to 6% range poised to replace trust preferred securities issued with yields as high as 7.5%, Marty Mosby, a banking sector analyst with Guggenheim Securities says that recent offerings are a way to build regulatory capital, while also giving balance sheet flexibility to increase lending in coming years. "
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