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Bank of America 'Best Positioned' for Trust Preferred Switch

Juneja also said that on a fully phased in basis, with all trust preferred shares being redeemed and required perpetual preferred shares being issued to more than make up the difference, Regions Financial (RF), SunTrust (STI) and Citigroup (C), "would see higher EPS hit than peers."

Among large regionals, Juneja expects PNC Financial Services Group (PNC) to complete the redemption of all of its trust preferred shares before the end of the year.

Juneja said that "large cap banks have redeemed or announced plans to redeem $38 bil in TruPS in 2012, with interest costs averaging 6.7% - well above deposit and long-term debt rates," and that the redemptions of trust preferred shares have helped net interest margins "hold up better than feared by reducing funding costs to offset some of the decline in asset yields." But trust preferreds that have not yet been called "can no longer be called due to regulatory change - securities will need to reach their call date in order to be eligible to be redeemed," and others "may not be called near term because they are floating rate or hedged and provide attractive low cost long-term debt funding," according to the analyst.

The largest U.S. banks have lagged the regionals in redeeming trust preferred shares. Juneja estimates that at the end of 2012, Citigroup (C) will have $12.4 billion in remaining trust preferred shares, with $10.5 billion for JPMorgan Chase (JPM), $10.1 billion for Bank of America, and $4.8 billion for Wells Fargo (WFC).

For Citigroup, things get a bit complicated, because the Federal Deposit Insurance Corp. is holding $3.025 billion of trust preferred shares -- including $800 million on behalf of the U.S. Treasury -- and it is "unclear if FDIC will allow these TruPS to be redeemed before 2014 call date, but if so, Citi will likely have to call at par, which would be a hit to capital and book value," according to Juneja, who added that "Citi also has $2.4 bil of TruPS with average coupon of 7.9% that are not callable until 2015 or 2036."

The analyst added that "Bank of America has called nearly $10 bil of TruPS in 2012, but still has $10 bil outstanding, most of which is callable," and that Wells Fargo's outstanding trust preferred shares "are also mostly callable."

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