At Least Six U.S. Banks May Need More Capital

Last week we learned that bank executives at the 19 largest U.S. banks, that were subjected to the stress test, received the results from the government. We also learned about the criterion the Fed used when evaluating the banks under certain economic scenarios. Basically, the Fed wants to see how the banks capital levels hold up assuming that the economy gets worse, which as we all know is not a stretch. We also know that, after reviewing the results, the banks can object to the government findings.

Today, Bloomberg is reporting that the government stress test found that at least six of the 19 banks require additional capital.

While some of the banks in need of capital will get extra government cash injections, most will convert government preferred shares into common shares, which will boost the banks' tangible common equity ratio. The government has already indicated that this swap would be an option. While the swap from preferred to common would avoid additional government cash, and the likely public backlash, it puts taxpayers in a much more vulnerable position should the banks fail.

Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC) are two of the six (or more) banks that will likely need additional capital, as reported in the WSJ yesterday. Other banks that may need more capital include regional banks like SunTrust Banks (NYSE: STI), KeyCorp (NYSE: KEY), and Regions Financial (NYSE: RF), analysts said. Fifth Third (Nasdaq: FITB) and PNC Bank (NYSE: PNC) may also need capital other analysts said.

Analysts said banks that may avoid raising additional capital could include: Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), State Street Corp. (NYSE: STT), US Bancorp (NYSE: USB), and maybe BB&T (NYSE: BBT) with a dividend cut.

JP Morgan (NYSE: JPM) may want to boost their capital cushion and payback TARP, but will likely be able to raise money in the private market.

Final results of the stress tests are expected to be released publicly next week, maybe as soon as Monday May 4.

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