A growing number of banks are eyeing quick repayment of US government capital injections after “stress tests” showed major lenders are healthy enough to manage without public support.
Goldman Sachs, Morgan Stanley, Bank of America and others said they would seek early reimbursement of the capital aid injections that began last year to shore up a financial system reeling from a housing meltdown and economic slump.
Others, notably Citigroup, may improve capital ratios by converting some of the government preferred shares to common stock — which will make the US Treasury a large stakeholder.
The Treasury has injected about $200-billion in capital into dozens of banks out of a total programme commitment for $250-billion within the Capital Purchase Program and Troubled Asset Relief Program (Tarp).
Some banks had argued that the capital programme was forced on them and imposed conditions such as limits on executive compensation, and raised fears about government meddling in bank operations.
“These [stress test] results produced a collective sigh of relief heard around the world,” said Patrick O’Hare at the research firm Briefing.com.
“It has been the market’s conclusion that these collective results are much less worrisome than had been thought weeks ago. Accordingly, it is now envisioning a new phase for the banks in which they start earning their way out of the Tarp halfway house in which they now reside.”
Goldman Sachs, which according to the stress tests did not need additional capital, said in a statement that “we have met all of the requirements stipulated and are highly confident that we will soon repay the government’s investment from the Tarp’s Capital Purchase Programme.”
Al Goldman at Wachovia Securities said the news that banks will turn to private capital markets was “very positive”, adding that, “the free enterprise system will rise from the dead if these offerings are successful”.
Morgan Stanley, determined to need a buffer of $1,8-billion, said it would seek to raise $7,5-billion as it moves to repay the Treasury.
Morgan Stanley said “it intends to repay the US Treasury’s Tarp investment as soon as possible”, pending the approval of its regulators.
Bank of America, seen as needing a capital boost of $33,9-billion, said it would sell some assets and take other actions to repay the US Treasury.
“Our intention will be to reach the government’s target on our own without exchanging any of the current US investment in Bank of America into mandatory convertible preferred stock,” said Joe Price, chief financial officer.
“That would allow us to minimise the use of government money and put us into a position to repay the government’s investment sooner.”
Treasury officials have said they will act with caution on allowing the banks to repay.
“Some banks will be able to begin returning capital to the government, provided they demonstrate that they can finance themselves without FDIC [Federal Deposit Insurance Corporation] guarantees,” Treasury Secretary Timothy Geithner said last month.
American Express chairperson and chief executive Kenneth Chenault said his firm had filed a request to repay its $3,4-billion of preferred shares from the Treasury injection, and would replace this with long term debt not backed by government guarantees.
AmEx said that since the government’s emergency actions, “financial markets have become more stable, and American Express has made substantial progress in adapting to a very difficult economic environment”.
The review by regulators showed that 10 big US banks need a total of $74,6-billion in extra “capital buffers”.
“The additional capital requirements specified are not particularly burdensome, and none of the banks should have any major problems reaching the indicated targets,” said economist Brian Bethune at IHS Global Insight.
The Federal Reserve, which conducted the tests at the request of President Barack Obama’s administration, said they showed the banks can withstand an adverse economic scenario but will be required to raise fresh capital to boost their reserves against losses.
Geithner said in a statement the tests “will help replace the cloud of uncertainty hanging over our banking system with an unprecedented level of transparency and clarity.” – AFP