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Stress Test Preview: Banks Holding Up

Stress tests on the 19 largest U.S. banks and thrifts are expected to be completed this month and the most recent data available looks OK.

Government stress tests on the 19 largest U.S. banks and thrifts are expected to be completed this month and the most recent data available for the holding companies likely being scrutinized shows that most appear in decent shape.

The list of companies undergoing "consistent, realistic, and forward looking" assessments, as Treasury Secretary Timothy Geithner said in February, has not been made public. It was not clear whether holding companies like



, whose primary business is life insurance, would be included in the mix. Therefore, published a

stress test preview

in March looking all 31 U.S. holding companies that filed consolidated financial statements with the Federal Reserve and had total assets of over $50 billion.

later compiled a list of 19 holding companies that the organization determined to meet the Treasury's criteria for the stress tests.

The following table includes earnings, capital adequacy and asset quality data for these 19 companies provided by SNL Financial. The data is as of Dec. 31, and earnings and loan charge-off figures are for all of 2008. Some capital and loan quality ratios are not included for companies such as

American Express



Goldman Sachs



Morgan Stanley


since the companies weren't required to file bank holding company data for Dec. 31.

JPMorgan Chase


is one of two holding companies on the list to have reported earnings for the first quarter of 2009. The company announced first-quarter net income of $2.1 billion, or 40 cents per common share, beating the Thomson Reuters consensus earnings estimate of 32 cents per share.

The company's provision for loan losses totaled $8.6 billion, staying well ahead of $5.7 billion in net loan charge-offs for the first quarter. The annualized ratio of net-charge-offs to average loans was 2.98%, and loan loss reserves covered 3.95% of total loans and 241% of nonperforming loans as of March 31.

JPMorgan's Tier 1 leverage ratio increased to 7.1% as of March 31, from 6.5% the previous quarter.

Goldman Sachs

also announced relatively strong first-quarter earnings and followed up with a $5 billion equity offer on Tuesday, saying it would use the new capital along with "other resources" to repay the $10 billion in preferred stock sold to the Treasury via the Troubled Assets Relief Program, or TARP.

While we still don't know how the regulators are applying various economic projections to holding company financials, looking back at capital levels and exposure of capital to nonperforming assets can provide some indication of which companies will concern regulators the most.

Capital Ratios

While the guidelines don't apply directly to holding companies, banks and S&Ls are generally considered to be


if they maintain Tier 1 ratios of at least 5% and risk-based capital ratios of at least 10%. Two of the holding companies on the list had Dec. 31 Tier 1 leverage ratios exceeding their risk-based capital ratios, because their average total assets for the fourth quarter (the denominator of the Tier 1 leverage ratio) were much lower than their Dec. 31 total assets, because of large mergers.

Wells Fargo


acquired Wachovia on Dec. 31, more than doubling its asset size from the previous quarter. While the company's Tier 1 leverage ratio was 14.52% as of December, if we simply divide the Wells Fargo's $86.4 billion in Tier 1 capital by its $1.3 trillion in total assets, the Tier 1 leverage ratio drops to 6.60%.

PNC Financial Services


reported total assets of $291 billion as of Dec. 31, nearly doubling in size during the quarter with its acquisition of

National City

. If we follow the same exercise and divide the company's $24.1 billion in Tier 1 capital by Dec. 31 total assets, we come up with a Tier 1 leverage ratio of 8.26%. While this is still a strong Tier 1 ratio for a large bank holding company, it's less than half of the 17.37% ratio taken from the consolidate financial statement for holding companies filed with the

Federal Reserve


The company with the lowest risk-based capital on the list is MetLife, which has been a bank holding company since it acquired the former Grand Bank of Kingston, N.J. in 2001. MetLife on Monday said it was not applying for TARP funds, but regulators may have other ideas depending on the outcome of the stress tests.

MetLife was also the company with the lowest Tier 1 leverage ratio on the list, at 5.77%. The second lowest was



, which had a Tier 1 leverage ratio of 6.08%.

The business media has recently focused on tangible equity ratios, which exclude intangible assets, such as goodwill (representing premiums above book value paid for acquisitions), deferred tax assets and mortgage servicing rights, from equity capital and total assets. The tangible common equity ratio does the same, but only excludes preferred stock and trust-preferred securities from equity, in an attempt to show the value of common shareholders' stake in the company. Of course, as we have seen with


, this ratio doesn't necessarily tale the whole tale, since the federal government is now the company's largest common stockholder.

There's no set method to calculate tangible equity ratios and SNL Financial, which provided the data for this article, follows a conservative approach. The holding company with the lowest tangible common equity ratio on the list is

Bank of New York Mellon


, with a ratio of 1.63%, followed by Citigroup at 1.77%,

State Street


at 2.70% and PNC at 2.73%.

This points to another danger of focusing on the tangible common equity ratio. The low ratios for Bank of New York Mellon and State Street reflect the companies' business models focusing on custody services, asset management, wealth management and other services.

Texas Ratio

Another quick way of identifying potential risk is the ratio of nonperforming loans and securities to Tier 1 capital and loan loss reserves. This is also known as the Texas ratio. The listed company with the highest Texas ratio as of Dec. 31 was

Bank of America


, at 24.74%. However, the ratio doesn't reflect the $30 billion in new capital infusions from the Treasury during the first quarter.

Other listed companies with relatively high Texas ratios included

Fifth Third


, at 22.94% and



with a Texas ratio of 21.75%. Fifth Third also had a nonperforming assets ratio of 3.01% as of Dec. 31, the highest on the list.

Stock Performance

The following table includes stock price and return information as of Wednesday's market close:

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.