Three big US banks raced to sell stock after the US government said top financial firms have a $75 billion hole in their capital, while first-quarter results from two European banks showed bad debts are soaring.
US regulators told 10 of the biggest US banks late last night to raise a total of $74.6 billion, which was less than investors once feared and helped lift European and US bank shares early today.
The relatively modest size of the hole found by regulators, after "stress tests" on the nation's 19 biggest banks, led to applause from investors who believe the worst is over but also skepticism among those who think the tests weren't rigorous enough.
Morgan Stanley said it sold $3.5 billion in stock this morning, and Wells Fargo & Co said it sold $7.5 billion in stock. Both deals were larger than expected but came at discounts of more than 11 per cent to yesterday's prices.
Bank of America Corp said it would sell 1.25 billion shares, after the government told the bank it had a $33.9 billion equity capital shortfall. The largest US bank said that in addition to selling shares, it would sell assets and take other steps to fill the hole.
Bank of America is better able to raise capital than the government estimated in its tests, chief executive Kenneth Lewis said in the interview with CNBC today.
Bank of America shares climbed about 10 per cent in premarket trading despite the impending dilution to current shareholders from a stock sale.
"It does seem to be counterintuitive," Lewis said with a smile. But he added more seriously that the rise in the shares reflected the "clarity and certainty" brought about by the release of the stress test results.
US bank shares were broadly higher in early trading, although Morgan Stanley shares slipped 6.4 per cent to $25.39 after it said it had sold 146 million shares at $24 each. Wells Fargo shares edged higher to $24.89 after the bank said it sold 341 million shares at $22 each.
Bank of America shares were up 4 per cent to $14.05.
Morgan Stanley also sold $4 billion of senior notes today, split evenly between 5-year and 10-year debt, as a step toward repaying $10 billion of capital received last fall under the Treasury's Troubled Asset Relief Program.
Morgan Stanley, Goldman Sachs Group Inc and JPMorgan Chase & Co are all hoping to repay their TARP money soon, in part to avoid pay restrictions that come attached to the funds. The US Treasury is set to soon release guidelines about pay at major banks.
Bank of America's Mr Lewis was upbeat on the economy, saying he still expects to see signs of a turnaround in the second half of the year.
But banks globally remain under pressure as rising unemployment and sinking house prices drive loan losses.
Reuters