Goldman Blesses Big Banks, Hits Regionals

Goldman Sachs analysts on Thursday upgraded large banks but expressed caution on regional counterparts after government stress tests.
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Goldman Sachs analysts on Thursday upgraded large banks to neutral, impressed by capital raising after the stress tests and with the prospect for gains in the mortgage and capital markets.

Writedowns from leveraged loans may be nearing the end, while mortgage and capital market results will "inflate" pre-provision earnings in the near term, according to a published note Thursday. "

While this can not last forever, it will help fund reserve builds," the note says.

The analysts also raised the rating on the trust banks to "attractive," as revenues may have "bottomed" last quarter.

Still Goldman kept a "cautious" rating on the regional banks "given less exposure to the mortgage and capital markets tailwind and more exposure to late cycle commercial and commercial real estate loans," the note says. Goldman has sell ratings on about half of the regional banks it covers.

Regional banks like

Fifth Third Bancorp

(FITB) - Get Report

and

Regions Financial

(RF) - Get Report

traded down on the news, losing 11% and 16.4% in recent trading.

Large banks including

Bank of America

(BAC) - Get Report

and

Wells Fargo

(WFC) - Get Report

also were down, but less so. All of the banks have been feverishly issuing common stock over the past two weeks.

Trust banks like

Bank of New York Mellon

(BK) - Get Report

and

State Street

(STT) - Get Report

were adding 1.5% and 3.5%, respectively.

Treasury Secretary Tim Geithner on Wednesday said banks have issued $56 billion in new stock or debt toward the $74.6 billion the federal government directed them to raise after conducting stress tests on the nation's 19 largest institutions.

And former Federal Reserve Chairman Alan Greenspan told

Bloomberg

in a report Thursday that "things have unquestionably improved" in the economy and financial markets, but added U.S. banks still must raise sizable amounts of capital.

"There is still a very large unfunded capital requirement in the commercial banking system in the United States and that's got to be funded," Greenspan said, according to

Bloomberg

. "

Until the price of homes flattens out we still have a very serious potential mortgage crisis."

The results of the government stress tests showed that the 10 of the top 19 banks needed to raise $74.6 billion in capital if the economy were to deteriorate to the worse of two sets of conditions the tests assumed.

Still others, including

Goldman Sachs

(GS) - Get Report

,

BB&T

(BBT) - Get Report

and

Capital One

(COF) - Get Report

, among others, have been issuing stock in order to repay funds received through the Troubled Asset Relief Program.

JPMorgan Chase

(JPM) - Get Report

, another bank that passed the stress test has, said it would like to repay TARP funds as soon as possible, but is waiting for guidance from the government before doing so.