JPMorgan estimates that banks under its coverage have "redeemed over $38 bil in TruPS, but issued only $10 bil in Preferred stock thus far in 2012," and estimates that the group "would need to issue about $40 bil of additional Preferred stock to reach 150bp of current risk weighted assets." which is the limit of preferred equity included as Tier 1 capital under the Fed's proposed rules. Juneja expects all of the large banks to have preferred shares making up at least 150 basis points of their Tier 1 capital ratios. "Very few banks are likely to hold excess Tier 1 common equity instead of issuing Preferred stock as it is a more expensive form of capital," he said.
The money center banks "would need to issue the most Preferred stock based on current risk weighted assets - $18 bil for Citi, $8 bil for Bank of America and $8 bil for Wells Fargo," Juneja said, estimating that Citigroup's 2013 earnings under this scenario would decline by 11 to 18 cents a share, or between 3% and 4%. "In contrast, for Bank of America, we calculate a net EPS gain of $0.03 or 3% of our 2013 EPS forecast, as it has a large amount of high cost TruPS outstanding (much of this came along with its acquisitions) and has some Preferreds outstanding already."
Among the large regional banks, "Regions and SunTrust are likely to see higher impact at about 5% hit to 2013 EPS. WFC, PNC, BBT, and USB would have the least impact - modest 0%-1% hit to 2013E EPS," Juneja said, adding that U.S. Bancorp "does not need to issue any additional Preferred stock as it issued a large amount this year and the impact is already in the EPS run rate."
Some of the largest banks are likely to see their balance sheets continue to shrink, which is a very important strategic goal for Bank of America and Citigroup. Juneja said that "for BAC, if [risk-weighted assets] were $50 bil lower, it would need to issue about $1 bil less and EPS accretion would increase a tad but stay around 3% or $0.03," and that for Citigroup, a $100 billion reduction in risk-weighted assets, which is quite possible as the company's Citi Holdings subsidiary winds down, "would reduce Preferred issuance by $1.5 bil to about $17 bil and EPS dilution to 3% from 4% currently."
Written by Philip van Doorn in Jupiter, Fla.