Now that the U.S. government's stress tests results revealed that nine out of the 19 banks tested do not need additional capital, expect to see more banks repaying their federal bailout money this year.
We expect several of the banks not needing additional capital to act in the near term to return their TARP funding," CreditSights analysts wrote in a note.
Paying back the TARP funds will allow these banks to operate their business without the onerous restrictions placed on the other banks in the program and could become an important competitive advantage vs. other bank peers," the note says. "So we could see some divergence in the banking sector between banks which return the TARP funds that are able to operate more freely and banks which still have the TARP investment may be subjected to more limits on their operations."
The stress test results announced by the
on Thursday revealed that the country's 19 biggest financial institutions will need to
as a buffer against loan losses through the remainder of the economic downturn.
Of the banks that were tested,
Bank of America
required the biggest infusion, of $33.9 billion, followed by
with $13.7 billion,
GMAC financing arm with $11.5 billion, and
with $5.5 billion.
Large banks that were told they did not need extra capital included
Bank of New York Mellon
Capital One Financial
CreditSights estimates that roughly $40 billion of some $246 billion the government has invested in bank preferred equity stakes through the Capital Purchase Program.
American Express, which has been saddled with troubled cardholders unable to pay their credit card bills, has requested to repay the $3.4 billion of preferred shares issued by the Treasury, it said in a release Thursday.
"We've always viewed
the capital purchase program as a temporary program, and we believe that repaying the investment at this time is not only in the best interest of American Express shareholders, but also good public policy," Chairman and CEO Ken Chenault said in a statement. "We believe our strong capital base gives us the resources to accommodate the spending needs of our creditworthy consumer, small business and corporate cardmembers."
Chenault added that the company believes it can "continue authorizing credit responsibly" and "contribute to an economic recovery in the U.S. after repaying the CPP investment."
Goldman Sachs also said that it believes it has met the requirements necessary to repay the $10 billion it received through TARP. The company is "highly confident that we will soon repay the government's investment," it said in a release. The company in April raised
to contribute to the process.
The 19 bank holding companies that were subject to the stress test and looking to repay their TARP investment must have "a post-repayment capital base at least consistent" with the stress test buffer told to them by regulators. The firm must also "be able to demonstrate its financial strength by issuing senior unsecured debt for a term greater than five years not backed by
Federal Deposit Insurance Corp. guarantees, in amounts sufficient to demonstrate a capacity to meet funding needs independent of government guarantees," the Fed says.
Fox Pitt Kelton Cochran Caronia Waller analysts speculate that BB&T is waiting on regulatory approval before attempting to finalize its plans to repay the $3.1 billion it received in TARP funding last year.
BB&T will likely have to cut its dividend and take on additional debt in order to do so, Fox Pitt says. But that once the Winston-Salem, N.C.-based company receives formal approval, "we expect BB&T will try to repay TARP by the end of 2009," according to a note.
"Now that the stress test is behind us, we will proceed with efforts to implement a capital plan that accomplishes our three strategic objectives," CEO Kelly King said.
"First, we must remain a very well-capitalized financial institution throughout this credit cycle," he said. "We also want to repay the government's investment under the Capital Purchase Program as soon as possible. Finally, our strong capital position will help us take advantage of future opportunities on the other side of this economic correction."
Still, not all the banks will want to repay TARP right away.
Harlan Platt, a finance professor at Northeastern University, said the best companies will probably repay TARP "using whatever means they have" as soon as possible.
"Some of these banks that have been labeled as 'passes,' may in fact be weaker and have difficulty down the road, unless the economy turns around," he says.
He also worries that banks will be "deterred" from lending to consumers and businesses as they look to either shore up their balance sheets or be wary of releasing funds to ensure they remain well capitalized in the eyes of the government.
The CreditSights analysts say that while companies like Goldman Sachs and JPMorgan Chase may want to repay the funds, the move may be overly aggressive if the economy worsens.
JPMorgan Chase is likely eligible to repay the $25 billion it received last October.
CEO Jamie Dimon said on a conference call Thursday that the company "will be in that process as soon as we can," according to