According to the government’s stress tests, 10 out of 19 of the largest US banks need additional capital in case of further deterioration of the US economy. These stress tests estimate that the banking system will face 600 billion in losses over the next few years. The 10 banks are Bank of America, Citigroup, Morgan Stanley, GMAC, Wells Fargo, Regions Financial, PNC, Suntrust, Key Corp and Fifth Third Bank. These 10 banks have until November to raise a total of 74 billion dollars. The bank that needs the largest infusion of capital is Bank of America (BAC). Bank of America needs 34 billion in additional funds which is substantial for a company with a market cap of just north of 100 billion. Wells Fargo (WFC) and GMAC are 2nd and 3rd on the list needing about 14 billion and 11.5 billion respectively.
The good news is for mega banks such as JPMorgan Chase (JPM), Goldman Sachs (GS)and US Bancorp (USB). These banks will have an increased ability to attract private equity capital due to their stress test results. Stronger banks will also be able to buy assets at distressed prices from institutions seeking to raise capital. These banks may also look to mergers to acquire weaker institutions and increase their deposit base.
Banks will either have to raise capital through: (1) offering additional common stock, (2) selling or divesting assets, (3) converting preferred shares to common shares. Banks can also hope that they generate earnings that are significantly above earnings estimates.
