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Financial Stocks Flat Ahead of Stress Test Results (XLF, BAC)

April 24, 2009 11:37 AM EDT
Financial stocks are flat in early trading today ahead of stress tests results, which will be given to the executives at the 19 banks being subjected to the test today. Treasury is also expected to release a public white paper on how the tests were conducted later this afternoon. The results on the sector and/or individual banks will not be made public until May 4th.

The most watched financial ETF, Financial stocks Financial Select Sector SPDR (NYSE: XLF), is showing a fractional move higher of 0.5% currently, but as market watchers know the sector is very volatile and can have 5-10% swing in minutes.

Banks are not expected to be given a grade and no one is expected to fail, but the government will recommend adequate capital levels that will be required under various stress scenarios. If the bank is under-capitalized under the stress scenario they will be required to raise capital, either privately or through the government, which could come from converting government preferred shares into common shares. The banks will be given time to argue the government results if need be.

Yesterday analysts at KBW had a very extensive research report on the stress tests and even conducted their own individual stress tests on the banks, coming to the conclusion that the industry needs another $1 trillion in capital. This is close to the $875 billion the IMF says is needed.

In its study, the firm said Bank of America (NYSE: BAC) is one of the banks most at risk and they think it will be the most likely to convert some of the government's preferred shares into common. They think the government could end up owning 30% of BofA.

Other banks that may eventually need more capital, according to the firm, include: Fitth Third (Nasdaq: FITB), KeyCorp (NYSE: KEY), PNC Bank (NYSE: PNC), Regions Financial Corp. (NYSE: RF), SunTrust Banks, Inc. (NYSE: STI), and Wells Fargo (NYSE: WFC).

Banks that look in a good position to pass the test without any additional capital include BB&T (NYSE: BBT), Bank of New York Mellon (NYSE: BK), Capital One (NYSE: COF), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), State Street Corp. (NYSE: STT), US Bancorp (NYSE: USB).

The firm said MetLife (NYSE: MET) is too hard to call since it is a life insurer and it is unclear how the Treasury stress test will be applied.

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