Bank of America needs $34 bln in new capital

Bloomberg

U.S. regulators have determined that Bank of America requires about $34 billion in new capital, the largest need among the 19 biggest U.S. banks subjected to stress tests, according to a person with knowledge of the matter.

Citigroup’s shortfall is more limited because the company already plans to convert government preferred shares to common stock, people familiar with the results said. JPMorgan Chase doesn’t need a deeper reserve against losses, according to people familiar with that company’s result.

The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Federal Reserve publishes the stress tests results today. Companies requiring more capital could raise all the funds through conversions of preferred shares if they choose, the people said.

"To the extent that there are banks that need capital, our hope is that many of them will be able to raise that capital through either private equity offers, or through conversions and exchanges of existing liabilities," Fed Chairman Ben S. Bernanke told lawmakers at a hearing in Washington Tuesday. "The data we have are accurate reflections of the financial conditions of those banks."

Banks that want to return money injected by the Treasury since October must show they can borrow from private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.

The Treasury will soon unveil conditions for repaying the Troubled Asset Relief Program money, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government. So far only a handful of smaller banks have done so.

Bank of America spokesman Scott Silvestri declined to comment.

Analysts’ estimates of the company’s shortage of common equity have ranged from zero to as much as $100 billion. Chief Executive Officer Kenneth D. Lewis declined to discuss the stress tests at Bank of America’s annual meeting last week, citing the Fed’s instructions to banks. He said April 20 in response to an analyst’s question that the company doesn’t expect to require additional capital.

Bank of America is considering selling part of its stake in China Construction Bank immediately instead of in a few weeks time, the Financial Times reported yesterday. A lockup on the stake expires today. Bank of America can sell as many as 13.5 billion shares of China Construction, or 6 percent of the Chinese lender’s outstanding shares traded in Hong Kong, on May 7, according to an earlier agreement.

Citigroup’s plans to strengthen capital base

While Citigroup has received the biggest rescue so far among commercial banks, it has taken steps in recent weeks to bolster its capital. Citi plans to get a $2.5 billion boost to tangible common equity, or TCE, from selling brokerage and investment banking units in Japan. It’s also pushing to complete a venture with Morgan Stanley ahead of schedule to lock in a $5.8 billion gain, people familiar with the matter said.

JPMorgan Chief Executive Officer Jamie Dimon said April 16 that he could repay the firm’s $25 billion in taxpayer funds "tomorrow" and referred to the money as "a scarlet letter." Repayment would free the company from compensation restrictions and other oversight.

People familiar with the matter said May 4 that about 10 of the 19 firms will be deemed to need additional capital. The number increased from six to eight a week ago, after regulators boosted their target for the reserves the firms must hold. Officials favor tangible common equity equal of about 4 percent of a bank’s assets, up from an earlier target of 3 percent, two people with knowledge of the deliberations said last week.

By exchanging preferred for common, banks would be able to increase their TCE, a measure of how much capital a firm has to withstand losses. The financial yardstick strips out intangible assets, goodwill - the premium above net assets paid for acquisitions - and preferred stock, including shares issued to the U.S. Treasury.

Along with JPMorgan, banks including Goldman Sachs Group and Bank of New York Mellon have sold debt without FDIC guarantees in the past month. Bank of New York Mellon said proceeds from its May 5 sale will be used to help repay the $3 billion capital injection it got from the TARP last year."It’s obviously not our intention or desire to have long-term government ownership of banks," Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a "few years" before banks can end their dependence on government capital.