Banks not spooked by further stress tests

A spokesman for 1 of the 6 publicly traded banks tells TheStreet that the Fed's plan is actually a good idea.

By TheStreet Staff Jun 10, 2011 2:51PM

By Philip van Doorn, TheStreet


The likely expansion of the Federal Reserve's stress tests beyond the largest banks could send these stocks reeling even further -- but is unlikely to have much of an immediate effect on most of the banks that would be subject to the ramped-up government scrutiny.


The Federal Reserve plans to expand its annual stress tests to review banks' capital adequacy to include all financial holding companies with total assets in excess of $50 billion, according to a Bloomberg report citing "people familiar with the discussions." So far, 19 banks have gone through two rounds of the tests.


Banks have been responding to a slew of new regulations in recent years. The CARD Act, passed in 2009, ended several practices that boosted credit card fee revenue. The Durbin Amendment, a provision of the Dodd-Frank banking reform legislation that will severely cap the interchange fees that large banks charge retailers to process debit card transactions, will soon present new challenges for banks.


The Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation also recently proposed guidelines on stress testing banks with assets of more than $10 billion.


The plan to conduct stress tests on banks with more than $50 billion in assets could delay industry consolidation and even have a chilling effect on lending as banks try to boost capital ratios by avoiding the risks of loans.

The 19 major banks that underwent the first two rounds of stress tests included Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC), as well as investment banking giants Goldman Sachs (GS) and Morgan Stanley (MS). Large regional players that underwent the previous stress tests included U.S. Bancorp (USB), PNC Financial Services (PNC), SunTrust (STI), B&T (BBT), Regions Financial (RF) and Fifth Third Bancorp (FITB).


After the most recent round of stress tests were completed in March, several of the largest industry players began returning capital to investors by raising dividends or announcing resumption or expansion of share buyback plans. Bank of America's original capital plan was rejected, although the company said it would file an amended plan with regulators. Regions Financial is the only remaining publicly traded member of the "stress test 19" not to repay government bailout funds received through the Troubled Assets Relief Program, or TARP. The company owes $3.5 billion in TARP money.


Expanding the stress tests beyond the original 19 banks would bring six more publicly traded regional players into the stress test group:


Northern Trust (NTRS) of Chicago had $92.7 billion in total assets as of March 31, with relatively small loan exposure, as total loans and leases were $27.9 billion at the end of the first quarter, according to data provided by SNL Financial. Northern Trust's Tier 1 common equity ratio was a strong 13% as of March 31 according to SNL, indicating very little worries from investors over stress tests.


That's the highest Tier 1 common ratio among the five additional banks with total assets greater than $50 million that would be subject to expanded government stress tests, for which the information is available.


M&T Bank (MTB) of Buffalo, N.Y., had $67.9 billion in total assets as of March 31. The company owes $230 million of the $600 million in TARP money it received in 2008, along with another $152 million in bailout funds originally provided to Provident Bancshares, which M&T acquired in May 2009.


M&T in May completed its acquisition of Wilmington Trust, repaying the acquired company's $330 million in TARP money.


The Wilmington sale was forced, as that company was in need of additional capital. M&T's March 31 Tier 1 common equity ratio was 6.8%, which was the lowest among the five additional banks that would be subject to expanded government stress tests, for which the information is available.


M&T's CEO Rene Jones said in a statement that "Capital planning and stress testing is nothing new at M&T," adding that M&T "had the lowest loan losses of any of the top 20 commercial banks through the financial crisis," and "the lowest TARP participation among the 25 largest commercial bank holding companies."


The company is looking to repay TARP without raising more capital.


Guggenheim securities analyst Mary Mosby on May 9 upgraded M&T to a "buy" from a neutral rating, with a price target of $114, saying the Wilmington Trust acquisition was "more accretive than the market appreciates," and that the company had "stronger capital ratios than is normally understood because of its best-in-class risk management approach."


Comerica (CMA) of Dallas had $55 billion in total assets of March 31, with a Tier 1 common equity ratio of 10.4%. With a strong capital base, Comerica is looking to expand its lending, although investors have been disappointed so far.


After the company announced its first-quarter results in April, Brett Rabatin of Sterne Agee reiterated his "buy" rating for Comerica, with a $45 price target, saying that the bank was "still leveraged more than many peers to an improving economy and should outperform as economic activity increases. The pace of improvement to date has been slow and may be slow for another quarter or so."


A call to Comerica requesting comment wasn't immediately returned.


Huntington Bancshares (HBAN) of Columbus, Ohio, had $53 billion in total assets as of March 31, with a Tier 1 common equity ratio of 9.75% and major expansion plans for its branch network. A company spokesman told TheStreet that said "since the original stress tests were performed in 2009 on the country's largest financial institutions, Huntington has routinely self-administered stress tests and has continuously met or exceeded federal standards."


Hudson City Bancorp (HCBK) of Paramus, N.J. is already operating under an Office of Thrift Supervision order that forced the company to restructure its balance sheet, after its long-term leverage strategy of borrowing from the Federal Home Loan Bank of New York and investing the proceeds in securities backfired in a prolonged low-rate environment. Hudson City announced a first-quarter net loss of $555.6 million and reduced its quarterly dividend to 8 cents a share, from 15 cents a share.


For the company's main subsidiary, Hudson City Savings Bank, the regulatory Tier 1 leverage ratio was 8.12% and its total risk-based capital ratio was 19.66%, well above the 5% and 10% required for most banks and thrifts to be considered well-capitalized.


While the company seems unlikely to need additional capital, even in the wake of its balance-sheet restructuring, the stress tests could stifle dividend increases down the line.


Hudson City didn't immediately respond to a request for comment.


Zions Bancorporation (ZION) of Salt Lake City had $50.8 billion in total assets as of March 31, with a Tier 1 common equity ratio of 9.3%. The company owes $1.4 billion in TARP money.

Director of Investor Relations James Abbot told TheStreet that "Zions has already been running stress tests and submitting the results to the Federal Reserve for a considerable period of time."


Abbot also said that "the stress test process is one of the best innovations that has come out of the crisis, and I would expect most banks to be subjected to stress testing by their regulators within the next several years."


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Jun 11, 2011 9:41AM
Maybe the banks are not spooked but the American taxpayer is. We do not want another Lehman to happen and unfortunately that is the direction  in which all this mess is headed.
Jun 11, 2011 12:37PM

Why does the government have to enforce something banks should be doing as part of being responsible not just to customers but indeed shareholders? Capital reserve ratios.


CEOs/boards/anyone paid massively in options and top shareholders (i.e. institutional funds and hedge funds) have gone to a point of greed not being good for the vast majority of everyone else.


Yeah, out of the millions of share holders, they are being responsible to about 100 of them.


How hard is it to look at your budget, your potential losses, and set aside 10% against your assets? Banks are more irresponsible than anyone else. Than households. Than the government. I mean, it's really ridiculous.

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