Uncertainty About Tsy's Bank Stress Test Keeps Analysts Wary
13 Februar 2009 - 8:03PM
Dow Jones News
The U.S. Treasury Department's plan for a stress test has
analysts voicing new wariness about investing in some banks.
Sanford C. Bernstein & Co. LLC analyst Kevin J. St. Pierre
wrote in a research report Friday that Fifth Third Bancorp (FITB)
is "essentially 'un-investable' at this point" because the outcome
of the test could mean that bank needs additional capital if the
economy worsens and loan losses double from Sanford Bernstein's own
projections.
Fifth Third isn't alone in the un-investible category. St.
Pierre's report shows that Regions Financial Corp. (RF) and
SunTrust Banks Inc. (STI) might also be on "quicksand" because they
might need to do capital raises that would hurt common
shareholders; KeyCorp (KEY) might be moving in the same
direction.
Representatives of Fifth Third, SunTrust and Regions declined to
comment on the Sanford Bernstein report. KeyCorp wasn't immediately
available for comment.
The stock market has been spooked by Treasury's stress test,
announced with little detail this week as part of the Obama
Administration's Financial Stability Plan. The fear is that the
test will seal the fate of some investments in banks without any
advance notice to shareholders.
Stress tests often look at how different extreme economic
conditions will affect banks' loans and investments.
But without much detail from the Treasury, bankers and analysts
have been left to speculate about the nature of the test. In a
separate report, Sanford Bernstein called the test
"mysterious."
David Hendler of CreditSitghts Inc. and Jason Goldberg at
Barclays Capital are among the analysts who have issued reports
with the results of their stress tests.
Analysts are trying to find guidance by taking another look at
last year's bank failures and government-assisted acquisitions, and
loan loss ratios.
Sanford Bernstein wrote, "Bank and thrift failures are a
function of capital, liquidity and regulatory risks. Some of the
largest "failures" of last year were the result of a combination of
these factors," the stress-test report by Sanford Bernstein
said.
Liquidity refers to money banks need to fund their day-to-day
operations. Longer term, capital is needed to make investments and,
most importantly right now, to provide a cushion for delinquent
loans.
Liquidity risk is largely mitigated at this point - banks are
liquid enough to be able to make the loans their borrowers want.
But capital and regulatory risk are "alive & kicking," the
report said. While regulators put in place programs to prevent bank
failures through capital infusions, those programs could
essentially wipe out common equity at some banks, leading to
"common equity failures," Sanford Bernstein wrote.
Not all banks looked bad. "Banks with higher capital levels are
analyzable and investable," St. Pierre said in an email to Dow
Jones Newswires. "I'd put Comerica Inc. (CMA), M&T Bank Corp.
(MTB,) and Capital One Financial Corp. (COF) in that camp."
While Fifth Third declined to comment, it appears not to share
St. Pierre's concerns. The analyst said he recently met with the
management of Fifth Third and, "justifiable or not," St. Pierre
"noted a conspicuous absence of panic among the team, though with a
clear recognition of the headwinds they face."
Fifth Third took aggressive measures in the fourth quarter to
provide for future loan losses and isolate soured loans to be sold
off. Chief Executive Kevin Kabat said in a recent interview with
Dow Jones Newswires that the Cincinnati company's core banking
business has been performing well despite the rise in
delinquencies. He pointed to rising earnings before taxes and the
provision Fifth Third put aside to cover current and future loan
losses.
-By Matthias Rieker, Dow Jones Newswires; 201-938-5936;
matthias.rieker@dowjones.com