Banks Profit and Sell Shares to Repay Tarp
by Hiland Doolittle
The Obama administration, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Benanke bet big that the American banks could stabilize and would lead the world out of the recession. The administration nearly emptied the taxpayer’s pockets in these stabilization efforts and then took the bull by the horns applying the stress tests to the country’s 19 largest banks.
Now that all the players know where they stand, the banks are seizing the opportunity to meet the government’s standards and fill their coiffures with cash. The recent stock market rally is helping these institutions raise billions in new capital and the government that has carried the banks for months is feeling some stress relief of its own.
The bank’s abilities to raise the capital required by the stress test results are cause for optimism in Washington. The ease with which the banks are accomplishing their fund raising is welcomed by Team Obama, who most likely would have received a cold shoulder from Congress had more bank financing been needed.
Capital One of McLean joined four other big banks in announcing new sales of common stock that should raise over $7 billion. Several other of the country’s largest banks announced on Monday that $19 billion has already been raised through public offerings.
BB&T of North Carolina, U.S. Bancorp of Minnesota and Bank of New York Mellon have joined Capital One is declaring plans to raise the funds to pay back TARP funding. All these banks passed the government’s stress tests and are not required to raise additional capital. All banks must demonstrate that they can issue debt without the benefit of government guarantees before they can repay the TARP funds and take the government out of the business of banking.
International Bank Profitability
The banking industry’s big first quarter profits and the momentum from surging equities may be difficult for banks to sustain, but the press is on. While U.S. banks have led the resurgence, European banks have entered the fray. Europe’s biggest bank, HSBC, has reported record first quarter profits and joins other European banks, which have been boosted by fixed income and currency trading strength.
Jon Peace, an analyst of Nomura, summed up the street’s view; “We’d rather own wholesale banks than commercial banks because we think the revenue environment is more supportive for wholesale banks. The commercial banks are starting to see the acceleration in non-performing loans, and that’s going to be more of a drag.”
While the banks are looking past, or around, the ever-increasing rise in non-performing loans, they are moving rapidly to grab a bigger piece of the overall pie. Thus far, the clear winners are Goldman Sachs and JPMorgan Chase in the U.S. and Barclays, BNP Paribas and Credit Suisse in Europe.
With failures like Bear Stearns and Lehman Brothers, and with pullbacks by the Royal Bank of Scotland, Citigroup and Bank of America, the healthier banks are climbing through the window of opportunity.
The perception is that first quarter profits realized by successful banks will not be duplicated. Year-end profits are anticipated in a range of about 2.5 to 3 times the size of those first quarter gains. A new sense of caution and the reality of troubled assets on balance sheets are coming into play. Banks may have endured the biggest of their portfolio write downs, as evidenced by Barclays, Societe Generale, RBS and Commerzbank announcing a combined write down of $12 billion, but there is still an abundance of exposure.
Currencies Respond
Many global analysts feel the fundamentals are weak and that equities are vulnerable, thus the recent rise in equities will turn back. However, the prevailing sense is that the worst is over and that equity markets will now return to the basics and arrive at proper valuation levels.
Overnight, the yen backed up from Monday’s gains, rising sharply as Wall Street slipped. The dollar slid to a four month low against a composite of currencies, but held its ground against the euro.
“The market returned to being a little more cautious about reading economic fundamentals after optimism reigned in the past two months. The key this week will be to see how much more profit-taking will come, with eyes on economies in emerging markets which give basic support to market hopes,” said Hideaki Inoue, the head manager of forex trading at Mitsubishi UFJ Trust.
It is expected that profit-takers will reduce their equity shares and re-enter the currency markets buying back dollars and yen. Meanwhile, the euro stayed flat at 132.37 yen as the dollar index against six major currencies slipped 0.2 percent to 82.681 .DXY.
Investors are anxiously awaiting Chinese trade data, which is due out on Wednesday. Retail sales and industrial production data fro April should reflect the direction of the market.
The Global View
European stocks have rallied as oil hit its highest level in six months. In Europe, energy equities moved higher and closed at their highest levels since November 2008. Unexpected downturns in China’s exports and in India’s industrial output, stifled many Asian stocks, which have enjoyed a 40% upturn since March. Asian and European markets embrace signs that the downturn has slowed but these markets remain cautious as fundamentals are mixed.
Jun Kato of Shinkin Central Bank reported; “The market has come to a turning point in terms of both technical moves and fundamentals. But, fundamentals per se are still weak, so the market is expected to show more vulnerability to the weak side of the economy as it has excessively priced in the positive side of it.”
The world has acknowledged the Obama administration’s commitment to restoring the country’s banking institutions have stabilized markets. Secretary Geithner and the Fed’s Bernanke have drawn praise for the depth of their actions. But, there are still many fundamental issues.
The government is expected to increase regulatory guidelines. Investment banking in the U.S. and around the world will never be the same as the U.S. responds to world criticism about the industry’s lack of regulation.
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
