CITIGROUP AND Bank of America have emerged as the US banks with the biggest capital shortfalls after the completion of the government’s “stress tests”, with Citi projected to require more than $50 billion in fresh equity and Bank of America nearly $35 billion.
Bankers said Bank of America’s capital need was more pressing because Citi had already agreed to bolster its balance sheet by converting preferred shares owned by the government and other investors and selling non-core businesses.
People close to the situation expect Citi to have to raise less than $10 billion in extra capital, and possibly as little as $6 billion, through the expansion of its planned conversion of preferred shares.
The move could slightly decrease the government’s stake in Citi, which was expected to be about 36 per cent under the original conversion plan.
The results of the government’s tests will be announced today.
The revelation that Bank of America needs about $35 billion in extra capital will increase pressure on Ken Lewis, its embattled chief executive.
Mr Lewis, who was stripped of his chairman role by a shareholder vote last week, had said he believed the company did not need more capital after receiving $45 billion in government aid.
Investors appeared to take the news of Bank of America’s capital requirement in their stride and the bank’s shares were more than 12 per cent higher at $12.18 in early afternoon in New York.
Other bank shares were also higher amid investor hopes their capital needs will be manageable.
Up to 10 of the 19 banks that underwent the stress tests, which looked at how banks would fare under adverse economic conditions, are likely to need fresh equity, according to people familiar with the situation.
Bankers and analysts say the list could include Wells Fargo, the San Francisco-based lender whose capital shortfall has been estimated at about $15 billion, Pittsburgh-based PNC and GMAC, the finance arm of General Motors.
However, the stress tests are believed to have found that institutions such as JPMorgan Chase, Goldman Sachs and American Express do not need additional capital even if the economy worsens.
The banks and the regulators declined to comment or were unavailable.
Bank of America, like other banks that received federal aid, has the option of converting the government’s stake into common equity.
However, such a move would leave the authorities with a large holding in the bank and dilute existing shareholders.
Analysts said the Charlotte-based lender would try to raise as much capital as possible from the sales of non-core businesses, and possibly an equity offering.
The government has spent three months conducting stress tests on the 19 largest US banks to determine their revenue, losses and capital needs, should economic conditions deteriorate even further than many economists expect.
The results are expected to reveal both aggregate and individual banks’ figures.
