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Banking stocks surge on Wall Street optimism
Shares leapt in Monday trading after investors were encouraged over the results of this week’s stress tests by American authorities
US banks saw their shares move sharply ahead on Monday on increasing optimism that this week’s release of government stress tests will be less severe than previously expected.
It is now thought that the banks will need to raise less fresh capital than had been feared and the sector responded with big gains, led by Bank of America, Citigroup and Wells Fargo.
Wells stock gained over 23 per cent and BoA closed 19 per cent higher as the Monday deadline for negotiations with the regulatory bodies passed. The results of the tests on the 19 banks involved in the scheme will be released on Thursday and banks themselves will be informed on Tuesday.
According to the Financial Times, Citi and BoA will both need around $10bn of fresh capital, which investors are likely to view positively. However, it is thought that ten or so banks will be pressed to raise more capital, a higher figure than previously assumed.
Estimates by some analysts had involved much higher requirements and Standard & Poor’s warned that it could downgrade 23 banks including the biggest in the sector, over increasing losses.
Nevertheless bank shares powered ahead in spite of the worries, with investors buoyed by optimism that most of the requirements for the extra funds would come from converting preference shares.
WHAT THEY ARE SAYING
Professor Joseph Mason, Ex-Treasury officer, on Bloomberg.com: "Rather than financial or economic fixes, it looks like the Treasury really doesn’t have enough money to address the situation, and therefore is going back to this idea that somehow if we change preferred [stock] into common, magically the problem goes away."
Dwight Cass, on BreakingViews.com: "That regulators are wrangling with banks over the results of these tests shows that they are not confident in their ability to understand the institutions. That gives banks too much power. It would be better for watchdogs to demand that they reduce their complexity to comprehensible levels. Otherwise they’ll retain the upper hand - and no amount of testing will be sufficient to diagnose their problems" ·
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1. JPMorgan Chase But even as the firm stands by its "fortress balance sheet", what troubles some is the company's massive exposure to consumer-related areas such as credit cards. That division posted a loss in the first quarter amid rising credit losses.
2. Citigroup New York City-based bank has already taken in $50 billion in government assistance. And before it reported a surprise first-quarter profit, it posted a staggering loss of $28 billion over the previous 18 months.
3. Bank of America Had it not been for Merrill Lynch, many wonder if Bank of America would be in much better position today.
4. Wells Fargo Matt O'Connor at Deutsche Bank worry that the company may be under pressure to raise capital -- especially if the downturn in the economy shows no sign of abating.
5. Goldman Sachs, regulators may be wondering about the consequences for the rest of the industry should Goldman find itself free of government restrictions.
6. Morgan Stanley Morgan Stanley also slashed its dividend to 5 cents in a bid to conserve $1 billion annually.
7. MetLife One of these things is not like the other. Chartered as a bank holding company but having refused taxpayer funds, insurer MetLife bears little resemblance, if any, to the other 18 companies that underwent the government's stress test. Analysts are perplexed as to how the government will value the company's assets or review its capital position
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