By Rebecca Christie
May 6 (Bloomberg) -- Wells Fargo & Co., the fourth-largest U.S. bank by assets, requires about $15 billion in new capital as a result of regulators’ stress test on the lender, according to a person familiar with the matter.
Regulators have said options open to lenders include converting existing government preferred shares; Wells Fargo got $25 billion in taxpayer funds last year. As part of the stress tests on the 19 largest banks, officials are assessing whether banks have enough common equity, among other capital measures.
Wells Fargo’s assessment compares with the $34 billion gap at Bank of America Corp. identified by people familiar with the matter late yesterday. JPMorgan Chase & Co. doesn’t need to raise its capital, people with knowledge of its results said, while Goldman Sachs Group Inc. and Bank of New York Mellon Corp. have taken actions that suggest they also passed their reviews.
The Federal Reserve is scheduled to publish the stress tests results tomorrow.
Wells Fargo spokeswoman Julia Tunis Bernard declined to comment. The bank’s stock pared gains after the news, and was up $2.03, or 8.7 percent, as of 11:52 a.m. on the New York Stock Exchange. The shares have dropped about 14 percent so far this year.
Chief Executive Officer John Stumpf said last week that Wells Fargo will pay back $25 billion to the Treasury’s Troubled Asset Relief Program and restore its dividend as soon as possible.
“We earn our way out,” Stumpf, said at the company’s annual shareholders’ meeting in San Francisco April 28. “This company has a great capacity to produce wonderful results. That will be the driving force.”
The stress tests were designed to incorporate potential earnings in their assessments of banks’ capital needs.
The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Fed’s announcement tomorrow. Companies requiring more capital could raise all the funds through conversions of preferred shares if they choose, people familiar with the matter said.
Banks that want to return money injected by the Treasury since October must show they can borrow from private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter. The Treasury will unveil conditions for repaying TARP cash as soon as today, they said.
JPMorgan, Goldman Sachs and Bank of New York Mellon have each sold debt without FDIC guarantees in the past month. Bank of New York Mellon said proceeds from its May 5 sale will be used to help repay the $3 billion capital injection it got from the TARP last year.
People familiar with the matter said May 4 that about 10 of the 19 firms will be deemed to need additional capital. The number increased from six to eight a week ago, after regulators boosted their target for the reserves the firms must hold.
Officials favor tangible common equity equal to about 4 percent of a bank’s assets, up from an earlier target of 3 percent, two people with knowledge of the deliberations said last week.
By exchanging preferred for common, banks would be able to Increase their TCE, a measure of how much capital a firm has to withstand losses. The financial yardstick strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the U.S. Treasury.
Bank of America
Bank of America’s capital shortfall is the biggest among the 19 banks, people familiar with the matter said yesterday. Spokesman Scott Silvestri in Charlotte, North Carolina, declined to comment. Analysts’ estimates of the company’s shortage of common equity have ranged from zero to as much as $100 billion.
Chief Executive Officer Kenneth D. Lewis declined to discuss the stress tests at Bank of America’s annual meeting last week. He said April 20, responding to an analyst’s question, the company didn’t expect to require more capital.
Lewis, 62, was ousted as chairman on April 29 after shareholders rebelled against management’s handling of the Merrill Lynch & Co. takeover.
While Citigroup has received the biggest rescue so far among commercial banks, it has taken steps in recent weeks to bolster its capital. The New York-based company plans to get a $2.5 billion boost to tangible common equity, or TCE, from selling brokerage and investment banking units in Japan. It’s also pushing to complete a venture with Morgan Stanley ahead of schedule to lock in a $5.8 billion gain, people familiar with the matter said.
Citigroup spokesman Stephen Cohen declined to comment.
JPMorgan Chief Executive Officer Jamie Dimon said April 16 that he could repay the New York-based firm’s $25 billion in taxpayer funds “tomorrow” and referred to the money as “a scarlet letter.” Repayment would free the company from compensation restrictions and other oversight.
JPMorgan spokesman Joseph Evangelisti in New York declined to comment.
Wells Fargo said last month that first-quarter profit jumped 53 percent from a year earlier as borrowers rushed to refinance mortgages amid record-low interest rates. It slashed its quarterly dividend 85 percent in March to save $5 billion.
Chairman Richard Kovacevich in March called the administration’s stress-testing program “asinine” and Berkshire Hathaway Inc. Chairman Warren Buffett, whose company is Wells Fargo’s biggest shareholder, said May 3 that Wells Fargo didn’t need any more capital.
The bank’s shares have dropped since it acquired Wachovia Corp. in December. Investors have been concerned that losses in Wachovia’s $482 billion loan book, which includes $118 billion of option adjustable-rate mortgages, will hurt Wells Fargo’s balance sheet and erode capital.
In accordance with accounting rules, Wells Fargo took initial writedowns on $37.2 billion of Wachovia’s troubled loans.
The Treasury and regulators have presented different options for the banks to shore up their books without taking taxpayer money, including selling assets, seeking private capital and converting previous government investments from preferred to common shares. Not including repayments, the Treasury has about $110 billion left in the $700 billion TARP.
For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Federal Reserve Chairman Ben S. Bernanke told lawmakers yesterday.
“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.Related Links
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