NEW YORK (
) -- 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
-- 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
$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
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:
: $868 million worth of TruPS; 36% of Tier 1.
: $3.6 billion in TruPS; 32% of Tier 1.
: $3.5 billion in TruPS; 26% of Tier 1.
: $2.8 billion in TruPS; 21% of Tier 1.
: $10.6 billion in TruPS; 21% of Tier 1.
: $1.2 billion in TruPS; 21% of Tier 1.
7. Wells Fargo: $19.4 billion in TruPS; 20% of Tier 1.
: $4.6 billion in TruPS; 20% of Tier 1.
9. Citigroup: $21.7 billion in TruPS; 18% of Tier 1.
: $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."
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-- Written by Lauren Tara LaCapra in New York