Who's Buying Bac Into The Stress Test Meeting Tommorow?
Q: total prop job of the big banks today into this take a look at wfc...just SILLY to bid that up today We always do this, right before some BIG news comes out.... and it's not the financial statements anymore, it's been govt. information releases. We'll sit here until those get out, then rocket (because we all know what the 'reports' will say).
A: worth a look, don't know how accurate- check out sti today, ouch Editor's note: Mike O'Rourke is the chief market strategist at BTIG LLC, a premier institutional brokerage and fund services company. As go the financials, so goes the market. Year to date in 2009, the S&P 500 and the financials have traded in the same direction 65 out of 76 trading days, which is 85% of the time. Since the announcement of the Financial Stability Plan on February 10, it 's been 90% of the time; since March 10, it's been 100% of the time. Needless to say, the rout in the financials late in the session likely took the broad market down with it. Financials dropped 4% in 25 minutes. The abrupt move in the final half hour of the session caught the market by surprise. The best explanation I found was a story from the morning edition of the Wall Street Journal, which has gained some traction; it said that "regulators used some estimates of likely losses on loans that were tougher than observers had expected." During the day, CNBC reported that the banks will need to maintain a Tangible Common Equity (TCE) ratio of 3% under the "more adverse" scenario. They noted that it isn't finalized, and the risk weightings will come into play. Knowing TCE will be a factor in the stress test, I've noted in the past that the government has used Basel standards and Tier-1 capital for 2 decades, and it's a mistake to once again change the rules midstream. TCE is the argument the bears in the financials have been making; therefore, the government felt the need to address those concerns. At first glance, the 3% TCE ratio appears tough, because the TCE ratio of many banks were already hovering below 3% at the end of 2008. The Risk-Weighted Assets (RWA) that the TCE is measured against will be the key. For example, right now, Citigroup's (C) TCE is under 2%, but its TCE/RWA is 3% even prior to the conversion of the preferred. Citi expects its planned preferred exchange to increase TCE/RWA to between 5.4% and 8.1%, depending on participation. Without the conversion, Citi is straddling the line and will have a tough time meeting the "more adverse" scenario without the preferred conversion. For additional perspective on Citi's pre-crisis preferred TCE/RWA level, refer to Citi's first-quarter 2008 conference call, in which it said it would "keep our Tier-1 capital ratio above the 7.5% level and the TCE to risk-weighted managed assets ratio above the 6.5% level." In this context, a TCE/RWA of 3% in the "more adverse" scenario is less than half of what you would expect in a healthy banking environment. When it comes to both Citigroup and Bank of America (BAC), the insurance protection that the government gave the firms in exchange for additional preferred shares lowers the risk weighting of the insured assets. For additional color, here are conference call comments on TCE and risk-weighted TCE (TCE/RWA) by some of the major banks who have reported first-quarter earnings. JPMorgan (JPM) "So with $87.2 billion of tangible common equity; that's up a couple billion dollars from last quarter obviously on these earnings. And with the benefit of retaining capital after reducing our dividend, that amounts to 7.2% of risk weighted assets, so the component of Tier 1 capital made up of tangible common equity all by itself exceeds the 6% well capitalized level of which preponderance is intended to be common equity... "And then including preferreds, Tier 1 capital is 11.3%. If you were to exclude the TARP capital at 9.2%, and remember we always guided and managed towards an 8 to 8.5% Tier 1 type of level." Bank of America (BAC) "Now let me say a few things about capital, and you can see this on slide 32. Tier 1 capital at the end of March was 10.1%, up from 9.15% at the end of the year due to the addition of Merrill Lynch, additional preferred, and quarterly earnings. "This Tier 1 ratio is lower than the pro forma projection we estimated in January due to the fact that we haven't finalized the insurance wrap with the Federal Reserve, and therefore the benefit is excluded from the 10.1%. It's estimated at approximately 65 basis points. Our tangible common equity ratio is 3.13%." Wells Fargo (WFC) "Our total common equity ratio, or TCE ratio, at March 31 was 3.28%, up from 2.86% a quarter ago. During the quarter, tangible common equity reached $41 billion, up $4.5 billion from December 31, 2008. About $1 billion of the increase was from retained earnings and $3.3 billion was from improvement in Other Comprehensive Income, including improvements in markets as well as a $2.8 billion after tax improvement in Other Comprehensive Income related to FSP FAS 157-4. "As described in our press release, FSP FAS 157-4 had no material impact on earnings in the quarter. Our reported TCE of 3.28% as well as TCE to risk-weighted assets of 3.83% also includes the up-front write-downs charge to equity related to Wachovia's impaired loan portfolios. The $40 billion of SOP 03-3 non-accretable difference from the Wachovia merger is the equivalent of approximately 190 basis points of additional tangible common equity." Morgan Stanley (MS) "Tangible common equity to tangible ratio was 4.3% in the first quarter, as you can see that supplement on page 3, this ratio is continually improved over the last five consecutive quarters. Additionally our tangible common equity to risk weight asset ratio was 9.3%." US Bancorp (USB) "Finally and importantly, our capital position remains strong. Our Tier 1 and total capital ratios were 10.9% and 14.4%, respectively, at March 31, both well above our target levels. Additionally, our tangible common equity to tangible asset ratio was 3.7% at March 31, while tangible common equity as a percent of risk-weighted assets was 4.0%. Both ratios were higher than on December 31 having benefited from earnings and the recent dividend reduction." Bank of New York (BK) "Both Tier 1 and TCE were up this quarter versus the fourth quarter. On a Tier 1 basis, we're in the first quartile of banks with or without TARP money. Our Tier 1 was 13.8% and 11.2% without TARP. Our TCE was 4.2% versus 3.8% last quarter. "Now, we are currently median versus our peer banks, but there's a clear reason for this. We have of course a large exposure to the value of securities relative to loans versus traditional banks. Hopefully, most of the problems in that class of assets are now behind us. And you should know that excluding OCI, our TCE is above 7%. That would be first quartile versus peers. This should eventually provide a lot of capital upside, as securities prices recover." SunTrust (STT) "Our Tier 1 capital stands at 19.13%, and our tier-1 leverage ratio stands at 10.44%, each at March 31, 2009. We are implementing our tangible common equity improvement plan that we announced on February 5, at our Investor and Analyst Day, and increased our pro forma TCE ratio, which assumes the consolidation of the asset-backed commercial paper conduits that we sponsor. "As of March 31, 2009, the TCE ratio is 5.87% and the pro forma TCE ratio is 2.22%, an improvement in the pro forma ratio of 103 basis points compared to December 31, 2008. Our TCE ratio, when calculated on a risk-weighted assets is 8.15% and on a pro forma risk-weighted basis is 3.34%, each at March 31, 2009." No positions in stocks mentioned. Minyanville staff and contributors may trade or hold securities that are discussed in an article. Staff and contributors will indicate whether they have a position in any security discussed, but will not indicate size or direction. The information on this site is not intended as individualized investment advice and all investment decisions by a reader must in all cases be made by the reader either individually or together with his/her investment professional. The views expressed in articles appearing on this site are solely those of the staff and contributors and should not be attributed to any other person or entity except where expressly stated. Minyanville staff and contributors will not respond to requests for investment advice.