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Top 4 Banks Must Find $86B in Capital: RBC

An analysis by RBC Capital finds that many big banks have heavy exposure to trust-preferred securities, which the new financial reform bill calls for them to replace with other types of capital.



) -- The so-called Collins amendment in the financial reform bill will have less of an impact than initially feared on bank capital levels. It will impact a handful of large banks in a significant way, however.

The provision, sponsored by Sen.

Susan Collins (R., Maine), will prevent banks with more than $15 billion in assets from using TruPS as part of their key Tier 1 capital levels. As a result, smaller banks -- which tend to rely heavily on TruPS as a capital crutch -- will not be affected.

However, according to an analysis by RBC Capital Markets, there are several major banks that have heavy exposure to TruPS as well. The top 10 on a percentage basis will need to replace more than $70 billion worth of TruPS with other types of core capital, either retained earnings or equity.

The four big money-center banks --

Bank of America

(BAC) - Get Report


JPMorgan Chase

(JPM) - Get Report



(C) - Get Report


Wells Fargo

(WFC) - Get Report

-- will need to replace $86.4 billion among them, with TruPS-to-Tier 1 ratios ranging from 15% at the low-end for JPMorgan, to 20% at the high-end for Wells Fargo. Though

Goldman Sachs'

(GS) - Get Report

$5.5 billion in TruPS represents a relatively small 8% of Tier 1 capital, its investment banking rival Morgan Stanley has heavy TruPS exposure, at 21% of Tier 1.

In other words: There's a potential for considerable new stock issuance and

additional dilution if big banks decide to act quickly to replace trust-preferreds without

divesting assets, or if they're unable to generate cash that quickly through

core earnings.

Still, it's important to keep in mind that banks have up to five years to phase-in the requirement. The RBC analysts expect them to rely mostly on retained earnings. Here are the top 10 publicly traded banks with at least $15 billion in assets that rely most heavily on TruPS as a portion of Tier 1, according to RBC:



(BPOP) - Get Report

: $868 million worth of TruPS; 36% of Tier 1.


Capital One

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(COF) - Get Report

: $3.6 billion in TruPS; 32% of Tier 1.



(BBT) - Get Report

: $3.5 billion in TruPS; 26% of Tier 1.


Fifth Third

(FITB) - Get Report

: $2.8 billion in TruPS; 21% of Tier 1.


Morgan Stanley

(MS) - Get Report

: $10.6 billion in TruPS; 21% of Tier 1.


M&T Bank

(MTB) - Get Report

: $1.2 billion in TruPS; 21% of Tier 1.

7. Wells Fargo: $19.4 billion in TruPS; 20% of Tier 1.


U.S. Bancorp

(USB) - Get Report

: $4.6 billion in TruPS; 20% of Tier 1.

9. Citigroup: $21.7 billion in TruPS; 18% of Tier 1.



(KEY) - Get Report

: $1.9 billion in TruPS; 18% of Tier 1.

The analysts, led by Gerard Cassidy, indicated that other means of capital generation -- such as converting hybrid securities into common equity -- may be dilutive as well.

"As many banks currently rely upon hybrid securities to support their core capital requirements, these new revisions prevent a scenario whereby banks would be required to commence near-term dilutive offerings to replace the hybrid securities," said Cassidy. "The final amendment allows banks to internally generate capital during the phase-out period, which should help mitigate future capital raises."

-- Written by Lauren Tara LaCapra in New York