Regional Banks Bide Time on Bailout Tabs
NEW YORK (
) -- Credit quality is improving but don't expect to see a wave of large regional banks paying back bailout funds just yet.
While the main money-center banks --
JPMorgan Chase
(JPM) - Get Report
,
Bank of America
(BAC) - Get Report
,
Wells Fargo
(WFC) - Get Report
and even
Citigroup
(C) - Get Report
-- all repaid taxpayer funds received under the Troubled Asset Relief Program last year, a number of the large regional banks still have yet to get out from under the government's shackles.
Bank stocks rallied ahead of first-quarter reporting season, and for most part, the
. But the large regionals lack the lucrative trading businesses that drove profit surprises for the money-center banks this past quarter, so many of them turned in losses. Narrower than expected losses maybe, but losses just the same. Spread income -- the bread and butter of the regionals -- is still being held back by weak loan demand and tighter underwriting standards, so the group may need some cooperation from the economy before the government will give them the okay.
"I think that it will be difficult for the regional banks that are still in a loss position to repay TARP," Nancy Bush, an independent analyst with NAB Research, writes in an email, adding later: "I think that economic recovery will need to be better established before we see companies like
SunTrust
(STI) - Get Report
and
KeyCorp
(KEY) - Get Report
repay TARP."
The need for these banks to sell stock in order to pay back the TARP funds is also a factor in the timing, Bush writes. Even though most of the stocks have performed well -- SunTrust and KeyCorp both reached 52-week highs last week and are up 40% and 60% respectively so far in 2010 -- dilutive equity offerings are always a tough sell.
Kevin Fitzsimmons, an analyst at Sandler O'Neill, was on the same page.
"I think what you saw this earnings period generally is moderating trends on credit, but at the same time headwinds on pretax pre-credit income -- in other words all your non-credit earnings," says Fitzsimmons. "The biggest headwind seems to be balance sheets contracting
and spread revenue going down. So if you look at that next layer of banks that haven't repaid, even if credit trends are moderating, if they're unprofitable and they go to repay," they might have to do a punitive capital raise in conjunction.
The Treasury has roughly $16 billion invested in the five largest banks still under TARP: SunTrust,
(RF) - Get Report
,
Fifth Third Bancorp
(FITB) - Get Report
, KeyCorp, and
( MI). All five banks reported first-quarter losses, but beat consensus estimates, and spoke of improving credit trends.
More on Regional Banks |
So the progress is positive but it's just not enough yet, according to Peter Winter, an analyst at BMO Capital Markets.
"Given that the credit trends are coming in better than expected, you probably want to see another quarter of this type of improvement before you can think about repaying TARP," Winter says. "At a maximum year end,
but it could be sooner. I think the regulators would want to see another
positive quarter before you start seeing the whole next wave of regional
banks repay TARP."
A recent success provides a blueprint for future paybacks as the payment of dividends related to the bailout funds was really all that was keeping
Comerica
(CMA) - Get Report
in the red. The company repaid $2.25 billion in TARP funds in the first quarter, and reported an overall loss of $71 million for the three months ended in March. Excluding the dividends paid to the U.S. Treasury, it earned $52 million for the March period.
Regional banks are at least thinking about repayment, even if it's a bit soon to follow through for most.
"We've begun to turn our thoughts toward the eventual goal of repaying TARP and what our normalized capital ratio should be in a post crisis, post TARP environment,"
Zions Bancorp
(ZION) - Get Report
CFO Doyle Arnold said on a conference call last Monday. "We don't have any specific plans for imminent TARP repayment, but we are considering various strategies that would eventually facilitate such repayment including actions that would affect both the numerator and the denominator of our regulatory capital ratios."
of $86.5 million, or 57 cents a share, for the first quarter, beating Wall Street expectations, and coming in well ahead of last year's equivalent period when it lost $852.3 million, or $7.47 a share. The government owns $1.4 billion worth of preferred stock in the company.
SunTrust CEO Jim Wells said the company is "well positioned" to repay TARP, but expressed concern about the dilution to existing shareholders that might be required.
"The reality is we are very sensitive about the dilution that might be required, and I say might because I don't know, were we to repay TARP say now for example," Wells said on SunTrust's recent conference call. "What we are trying to do is to balance our devotion to our existing shareholders and the dilutive effect that might occur with potential increases in stock price or reduced requirements or whatever. What we are doing is we are running a balancing act here we think is benefiting everybody and certainly has so far."
SunTrust recorded a loss of $229 million, or 46 cents a share, for the quarter, about equal on a per share basis to the year-earlier quarter excluding a large goodwill charge it took last year.
Huntington Bancshares'
(HBAN) - Get Report
situation may sum the state of TARP repayment for the regionals up best. While the company reported a surprise first-quarter profit of $39.7 million, or a penny per share, it said it wants to see further economic improvement and produce another quarter of profit before addressing its bailout tab.
"
When we get both of those, and we have an outlook we can have confidence in, we'll revisit the topic," said Huntington CEO Stephen Steinour said in response to an analyst's question. "But
the company isn't feeling any pressure to do anything at this point."
--
Written by Laurie Kulikowski in New York.