'Stress Test' Preview: U.S. Bank Problem List

Federal regulators by the end of April will complete "stress tests" to determine the financial health of the top 19 major U.S. banking organizations with more than $100 billion in assets. While we can't replicate the government's tests with available data, we can get a pretty good idea of which banks will be scrutinized and what the results will look like.

The stress tests are "forward-looking capital assessments" meant to determine whether any of the large bank holding companies need "an additional capital buffer during this period of heightened uncertainty," according to the Treasury's White Paper on the Capital Assistance Program. Regulators will conduct two tests: One using assumptions for gross domestic product growth and unemployment expected by most economists; and another using a "more adverse scenario," reflecting a deeper recession than what is currently forecast.

Holding companies found to be in need of additional capital will have six months to either raise some or all of the capital privately, or apply to immediately raise some or all of the needed capital from the treasury, through the CAP.

In the below list, we have emphasized the ratio of nonperforming loans and debt securities to tier-1 capital and loan loss reserves. This is also known as the "Texas Ratio."

Stress Test

While so many recent discussions have focused on tangible common equity ratios, the fact is that preferred equity capital is still capital. Tier-1 capital is total equity capital less some goodwill, other intangible assets and, in some cases, non-qualifying preferred stock.

While we can't replicate the stress tests that bank regulators and holding companies will be running, the Texas Ratio at least shows which of the largest holding companies have the most exposure of tier-1 capital and loan loss reserves to problem assets. A level over 20% is typically considered excessive.

Here's a list of all U.S. holding companies with total assets greater than $50 billion that filed Consolidate Financial Statements for Holding Companies (FR Y-9C) with the Board of Governors of the Federal Reserve System, for Dec. 31. For holding companies controlled by foreign companies, the top holding company is also listed:

Largest Holding Companies with Federal Reserve Y-9C Filings
Dec. 31, 2008 ($Bil)

It's important to point out that the figures for Bank of America ( BAC) don't include the additional $10 billion in additional capital the company received via the Treasury's Troubled Asset Relief Program, or TARP, on Jan. 9, following the year-end acquisition of Merrill Lynch. On Jan. 16, the Treasury announced it would provide an additional $20 billion in new capital to Bank of America. Since neither the assets acquired from Merrill nor the $30 billion in new capital were included in the company's Dec. 31 filings, Bank of America may appear in stronger shape when first quarter 2009 numbers are available

U.S. controlled large bank holding companies with Texas ratios exceeding 20% included Citigroup ( C), Wells Fargo ( WFC), SunTrust ( STI), Fifth Third ( FITB), Marshall & Ilsley ( MI) and Huntington Bancshares ( HBAN).

Citi on Friday reached an agreement with the government to convert up to $25 billion in preferred shares issued to the Treasury into common stock. This will significantly boost Citi's tangible common equity ratio, but no matter how high the tangible equity ratio gets after the move, the stake of the company held by non-government shareholders hasn't changed.

Citi also announced it would offer to convert roughly $27.5 billion in preferred and trust-preferred shares sold to other investors. But since the company also announced it was suspending dividends on those securities, preferred shareholders might be facing a very difficult decision.

Foreign-controlled Holding Companies

Four of the 19 U.S. holding companies with over $100 billion that filed Dec. consolidated financial statements with the Federal Reserve were foreign-owned, and three of those had critically low levels of capital as of Dec. 31.

The Treasury's documentation on the CAP stipulated that financial institutions "controlled by a foreign entity" were not eligible for assistance. A call to the Treasury Department requesting clarification was not returned.

Two of the foreign-owned companies had negative capital ratios as of Dec. 31, but the U.S. banks held by the holding companies were well capitalized.

Taunus Corp. is controlled by Deutsche Bank AG ( DB). Taunus holds Deutsche BankTrust Company Americas, which had tier-1 leverage and total risk-based capital ratios of 16.58% and 35.98% as of Dec. 31. These ratios need to be at least 5% and 10% for a bank to be considered well-capitalized. Taunus also holds Deutsche Bank Trust Company Delaware, which had tier-1 leverage and risk-based capital ratios of 39.45% and 47.77$ as of Dec. 31.

TD BankNorth Inc., controlled by Toronto-Dominion Bank ( TD), holds TD Bank NA, which had tier-1 leverage and total risk-based capital ratios of 6.81% and 10.77% as of Dec. 31. BankNorth USA, NA had tier-1 leverage and total risk-based capital ratios of 5.84% and 58.90%.

Philip W. van Doorn joined TheStreet.com 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.

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