Capital Concerns Hit BofA, Citi

Updated from 10:50 a.m. EDT

Bank of America ( BAC) and Citigroup ( C) shares traded lower on Tuesday on concerns government stress tests would show capital levels at each bank to be insufficient to weather the economic storm.

BofA was down 6.3% at $8.36 and Citi fell 4.9% at $2.92 in recent trading.

The Wall Street Journal reported in its Tuesday edition that early results of the government's stress tests have shown that both companies will need to raise additional capital. Bank of America's capital shortfall amounts to billions of dollars, though Citi's shortfall remains unclear, the Journal said, citing people familiar with the matter.

Spokespeople for both banks declined to comment.

Executives at both BofA and Citi are objecting to the preliminary findings, the newspaper reports, and the two banks are planning to respond with detailed rebuttals. BofA is expected to appeal by Tuesday, a day ahead of its annual shareholder meeting.

Both banks have struggled to give the impression that they are charging ahead, improving their balance sheets, and preparing for further economic deterioration -- without a need for additional funds. Each has already received $45 billion from the federal government in exchange for preferred stock to plug holes in their balance sheets from toxic loans.

While Citi's issues are all its own, BofA has used some of its funds to cover losses from the acquisition of troubled investment bank Merrill Lynch. BofA has struggled to separate itself from its weakened competitor in investors' eyes. CEO Ken Lewis has said that accepting additional funds for the Merrill deal "put us too far away from the mainstream, and it did lump us together with Citigroup" and has predicted that BofA would pass the stress test.

Reports last week that regulators pressured Lewis into sealing the Merrill deal helped bolster the impression that BofA was OK -- Merrill was the issue, and it wasn't Lewis' fault.

Still, both BofA and Citi, like all banks, are facing economic headwinds that stand to hurt consumer-loan portfolios. If deteriorating loan books requires new money, investors may not care whose fault it is, making it difficult to find private funds to patch holes in the balance sheet.

Worries were clear last week when shares of BofA and Citi sank, despite first-quarter results that beat expectations.

Industry analysts and investors predict that some regional banks likely fared poorly on the stress tests. Analysts consider Regions Financial ( RF), Fifth Third Bancorp ( FITB) and Wells Fargo ( WFC) to be among the leading contenders for more capital.

Staff writer Lauren LaCapra contributed to this report.

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