Skip to main content

Regional Banks Under the Microscope

Regional banks could feel pressure to raise more capital as the results of the government stress tests are laid out this week.

Regional banks could feel pressure to raise more capital as the results of the government stress tests are laid out to the nation's largest institutions this week.

Analysts digested what little detail came out of the

Federal Reserve's

white paper, published Friday, describing the

stress test methodology

used by the government in assessing the capital needs of banks in a worsening economy. The stress tests were performed on the 19 largest banks that have at least $100 billion in assets.

But Wall Street was disappointed that little detail and no actual results were released in the white paper. Regulators are reportedly to release results of the

stress tests

on May 4, though exactly how much detail will be made public at that time also is unknown.

Keefe, Bruyette & Woods estimates that the U.S. banking industry would need $1 trillion of capital in order to have a loan-loss reserve of at least 2% of loans, tangible common equity ratio in excess of 5% and well-capitalized other regulatory capital levels, according to a note published on Thursday.

Bank of America



Wells Fargo


could "potentially face exchange offers in which preferred stockholders may be converted into common equity," according to a note by fixed-income analysts at CreditSights. "We also sense that some of the regional banks may need to consider exchange offers."

Regional banks generally "have higher loan exposures to categories such as commercial real estate. As well, they often have a smaller cushion in the lower-tier debt instruments," the analysts say. "So we cannot rule out that exchange offers along the lines of



may be forthcoming from the regionals."

Bank stocks were generally falling on Monday. The KBW Regional Bank index was down 4.8%.




Regions Financial


are two of the stronger regionals and could get additional capital through an asset sale or from the Treasury, if needed, CreditSights says.

Marshall & Ilsley



Zions Bancorp


"could be subject to regulatory intervention solution if they could not get capital via the Treasury or markets," it adds.

BMO Capital Markets analyst Peter Winters is concerned that regulators may use the test as a benchmark and apply it to any bank outside of the top 19, "which could result in forced capital raises

in the regional bank sector if deficiencies are found," he writes in a note.

Winters says that under his own analysis, none of the regional banks he covers are "insolvent," but tangible capital equity levels "were drawn down to razor thin levels," according to a note.

"Banks that tended to look strongest were the ones that have taken the most proactive credit management steps in 2008, those that are among the more conservative underwriters in the industry and the ones that have a high percentage of fee income to total revenues," Winters writes in a note.

BB&T and

US Bancorp


"fared the best," due to their strong "revenue-generating franchises" and "dependable revenue streams" that will help them "earn their way through the credit downturn," he writes. US Bancorp was among the 19 banks that received initial stress tests.

Other banks that had strong capital levels included

First Horizon



PNC Financial Services



Fifth Third



PNC and Fifth Third also received exams. PNC is benefitting from so-called purchase accounting marks it had taken as a result of its acquisition of

National City

. Fifth Third will benefit from the expected 51% sale of its processing business.



, Regions, Zions,

M&T Bank



Huntington Bancshares


could need more capital, according to Winters.

Independent analyst Nancy Bush says the "angst" over Wells Fargo passing its stress test is "much overdone."

Wells Fargo's "ongoing integration of Wachovia -- including a higher level of expense saves than was initially anticipated -- will provide this company with rising

pre-provision net revenue as we go into 2010, and this has to be a consideration for regulators as they decide which companies need additional 'help' to deal with the ongoing recession," Bush writes in a note in which she downgraded the company.

But she cautions thought that the company's "relatively low levels of Tier 1 capital and TCE (8.3% and 3.3%, respectively), although growing strongly, are admittedly a wildcard in this whole equation."