Enjoy the obstacles with positive attitude
Tuesday, March 20, 2012
http://www.bloomberg.com/news/2012-03-18/ups-said-to-reach-deal-to-buy-tnt-express-to-grow-in-europe-1-.html
United Parcel Service Inc. (UPS) agreed to buy TNT Express NV (TNTE) with a sweetened bid of 5.16 billion euros ($6.8 billion), securing the biggest deal in the U.S. company’s 105-year history to challenge Deutsche Post AG (DPW) in Europe.
TNT accepted an offer of 9.5 euros a share in cash, the companies said in a joint statement today. That’s 5.6 percent more than the 9-euro bid turned down last month and 54 percent more than the closing price on Feb. 16, the day before the talks were made public.
Enlarge image
A logo sits on a gate outside a TNT distribution center in London. Photographer: Simon Dawson/Bloomberg
Play Video
(Removes incorrect spelling in television graphic.) March 19 (Bloomberg) -- United Parcel Service Inc. raised its offer for TNT Express NV by 5.6 percent to 5.16 billion euros ($6.8 billion) to secure the biggest deal in the U.S. company’s 105-year history and challenge Deutsche Post AG. Olivia Sterns and Maryam Nemazee report on the acquisition on Bloomberg Television's "On the Move." (Source: Bloomberg)
Enlarge image
A UPS truck. Photographer: David Paul Morris/Bloomberg
Enlarge image
United Parcel Service Inc. reached an agreement to buy TNT Express NV after raising its bid for Europe’s second-largest express delivery service, according to two people with knowledge of the talks. Photographer: Tim Boyle/Bloomberg
Enlarge image
TNT Express NV employees process incoming and outgoing freight at Liege Airport in Grace-Hollogne, Belgium. Photographer: Jock Fistick/Bloomberg
UPS, the world’s largest package-delivery company, will vault into equal footing in Europe with Deutsche Post (DPW)’s DHL, the market-share leader. UPS expects the combination with Hoofddorp, Netherlands-based TNT to produce pretax cost savings of 400 million euros to 550 million euros annually after four years.
“We like that the deal increases UPS’ non-U.S. revenues, and expect Europe, currently depressed, to eventually provide a strong growth engine,” James Corridore, a Standard & Poor’s equity analyst in New York, said in a note to clients. He rates Atlanta-based UPS as buy.
UPS gained 1.8 percent to $79.83 at 9:50 a.m. in New York, the highest intraday price since July 2006. TNT rose 1.1 percent to 9.45 euros in Amsterdam trading.
Savings Sources
Investing in TNT means UPS won’t soon meet its target of a 25 percent return on investor capital, Chief Financial Officer Kurt Kuehn said on a conference call. Cost savings will be primarily found in intra-national delivery services, the two companies’ air networks and in administration and procurement operations, he said.
The cost of combining with TNT over the four-year period will be about 1 billion euros.
UPS expects to receive regulatory approval for the deal by the end of the third quarter, Kuehn said, adding that it’s too early to say what divestitures might be needed to satisfy antitrust concerns.
“We are confident that we will receive all required approvals and expect to receive competition clearance from the European Commission in phase one,” Kuehn said.
UPS controlled 7.7 percent of the European express-parcels market in 2010, compared with TNT’s 9.6 percent, according to industry researcher Transport Intelligence. Combined, they would be about as large as DHL, which had a 17.6 percent share.
Deutsche Post’s View
Deutsche Post expects antitrust regulators to examine the deal very closely, said Dirk Klasen, a Bonn-based spokesman for the German company. A takeover of this scale and complexity makes such an evaluation imperative, he said, adding that the emphasis would probably be on the European operations.
TNT announced plans last month to focus on Europe, where its operating profit was 356 million euros last year, after reporting an overall operating loss of 105 million euros in 2011. Losses were 360 million euros in the Americas and 76 million euros in the Asia-Pacific region.
“TNT’s business outside of Europe was not of a large enough scale to merit a wait-and-see stance,” said Edgar Taverne, a portfolio manager in the Dutch city of Utrecht at Syntrus Achmea, which manages less than 1 percent of TNT stock on behalf of parent Achmea Holding NV. “The 9.50 euros-per- share price is fair. This was about right for the standalone express business.”
UPS Takeover View
UPS seeks a minimum acceptance rate of 80 percent of shareholders. TNT’s management and supervisory boards recommend accepting the deal, they said. TNT was spun off in May from the Dutch postal operator, PostNL NV (PNL), which is still the largest owner. PostNL said today it will tender its 29.8 percent stake.
At 9.50 euros a share, the deal values TNT at 13 times its last four quarters’ earnings before interest, taxes, depreciation and amortization, compared with a median of 10 times trailing Ebitda in nine other similar deals, according to data compiled by Bloomberg.
“The offer is disappointingly low,” said Andre Mulder, an Amsterdam-based Kepler Capital Markets analyst, who rates TNT as buy. “If you compare it to the price when the company was split off last May, it’s only a few tenths of cents higher. I do expect some of the shareholders to say that this isn’t really a premium.”
A bid by UPS or FedEx Corp. (FDX) had long been fodder for industry speculation as the U.S. companies studied expansion in Europe. TNT Chairman Antony Burgmans said today a counterbid from FedEx was “highly unlikely.” FedEx doesn’t comment on competitors, said Baerbel Bussenius, a spokeswoman in Brussels.
Job Cuts
UPS doesn’t rule out cutting jobs at TNT, Chief Executive Officer Scott Davis said at a press conference today in Amsterdam, adding that the company looks “to attrition first before we have forced redundancies.”
While UPS intends to retain the Cologne-Bonn airport as its main air cargo hub in Europe, the company has no plans to shut TNT’s Liege facility, which employs 1,400 people, Davis said. UPS will cease to use the TNT brand in the long term, he said.
UPS has an AA- rating from Standard & Poor’s and an Aa3 grade from Moody’s Investors Service. That’s the fourth-highest investment level in both cases. UPS, known for its brown vans and trucks, has $13.3 billion in bonds and loan facilities outstanding, of which $2.3 billion falls due this year, according to data compiled by Bloomberg. Its debt burden is the same size as a year ago, the data show.
Biggest Purchase
Buying TNT will be UPS’s biggest purchase since UPS was founded in 1907 as a bicycle-messenger service. The deal tops the 2005 acquisition of Overnite Corp. (OVNT) for about $1.25 billion in cash, which gave UPS the ability to make U.S. land shipments of parcels too large to be lifted by a driver.
International packages generate the most revenue for UPS, at $19.30 each in 2011, compared with $9.30 per domestic parcel. The $12.2 billion in sales for that business last year was 23 percent of UPS’s $53.1 billion total, which the company doesn’t disclose on a regional or country-by-country basis. Following the TNT purchase, international revenue will rise to 36 percent of overall sales, UPS said today.
TNT, which employs 77,500 people and whose name derives from the postwar Australian company Thomas Nationwide Transport, sold its Indian domestic road business in December and has been hurt by costs from revamping unprofitable Brazilian operations.
“The strength of TNT is as a European franchise,” CEO Marie-Christine Lombard said at the Amsterdam press conference. “We’ve always missed the U.S. link; it was a well-known issue for us. This combination will benefit our customer base by being able to offer a U.S. capability.”
The company has a 570 million euro revolving loan facility, which hadn’t been drawn down as of Dec. 31, and no bonds, according to data compiled by Bloomberg. It has a BBB+ credit rating from Standard & Poor’s, the eighth-highest grade, while Moody’s Investors Service rates it a level lower at Baa2.
Morgan Stanley (MS), UBS AG (UBSN) and Bank of America’s Merrill Lynch unit were financial advisers for UPS. TNT Express worked with Goldman Sachs Group Inc. (GS) and Lazard Ltd. (LAZ) advised the Dutch company’s supervisory board. Freshfields Bruckhaus Deringer LLP (1002L) was UPS’s legal adviser and Allen & Overy LLP (323556L) worked with TNT.
TNT accepted an offer of 9.5 euros a share in cash, the companies said in a joint statement today. That’s 5.6 percent more than the 9-euro bid turned down last month and 54 percent more than the closing price on Feb. 16, the day before the talks were made public.
Enlarge image
A logo sits on a gate outside a TNT distribution center in London. Photographer: Simon Dawson/Bloomberg
Play Video
(Removes incorrect spelling in television graphic.) March 19 (Bloomberg) -- United Parcel Service Inc. raised its offer for TNT Express NV by 5.6 percent to 5.16 billion euros ($6.8 billion) to secure the biggest deal in the U.S. company’s 105-year history and challenge Deutsche Post AG. Olivia Sterns and Maryam Nemazee report on the acquisition on Bloomberg Television's "On the Move." (Source: Bloomberg)
Enlarge image
A UPS truck. Photographer: David Paul Morris/Bloomberg
Enlarge image
United Parcel Service Inc. reached an agreement to buy TNT Express NV after raising its bid for Europe’s second-largest express delivery service, according to two people with knowledge of the talks. Photographer: Tim Boyle/Bloomberg
Enlarge image
TNT Express NV employees process incoming and outgoing freight at Liege Airport in Grace-Hollogne, Belgium. Photographer: Jock Fistick/Bloomberg
UPS, the world’s largest package-delivery company, will vault into equal footing in Europe with Deutsche Post (DPW)’s DHL, the market-share leader. UPS expects the combination with Hoofddorp, Netherlands-based TNT to produce pretax cost savings of 400 million euros to 550 million euros annually after four years.
“We like that the deal increases UPS’ non-U.S. revenues, and expect Europe, currently depressed, to eventually provide a strong growth engine,” James Corridore, a Standard & Poor’s equity analyst in New York, said in a note to clients. He rates Atlanta-based UPS as buy.
UPS gained 1.8 percent to $79.83 at 9:50 a.m. in New York, the highest intraday price since July 2006. TNT rose 1.1 percent to 9.45 euros in Amsterdam trading.
Savings Sources
Investing in TNT means UPS won’t soon meet its target of a 25 percent return on investor capital, Chief Financial Officer Kurt Kuehn said on a conference call. Cost savings will be primarily found in intra-national delivery services, the two companies’ air networks and in administration and procurement operations, he said.
The cost of combining with TNT over the four-year period will be about 1 billion euros.
UPS expects to receive regulatory approval for the deal by the end of the third quarter, Kuehn said, adding that it’s too early to say what divestitures might be needed to satisfy antitrust concerns.
“We are confident that we will receive all required approvals and expect to receive competition clearance from the European Commission in phase one,” Kuehn said.
UPS controlled 7.7 percent of the European express-parcels market in 2010, compared with TNT’s 9.6 percent, according to industry researcher Transport Intelligence. Combined, they would be about as large as DHL, which had a 17.6 percent share.
Deutsche Post’s View
Deutsche Post expects antitrust regulators to examine the deal very closely, said Dirk Klasen, a Bonn-based spokesman for the German company. A takeover of this scale and complexity makes such an evaluation imperative, he said, adding that the emphasis would probably be on the European operations.
TNT announced plans last month to focus on Europe, where its operating profit was 356 million euros last year, after reporting an overall operating loss of 105 million euros in 2011. Losses were 360 million euros in the Americas and 76 million euros in the Asia-Pacific region.
“TNT’s business outside of Europe was not of a large enough scale to merit a wait-and-see stance,” said Edgar Taverne, a portfolio manager in the Dutch city of Utrecht at Syntrus Achmea, which manages less than 1 percent of TNT stock on behalf of parent Achmea Holding NV. “The 9.50 euros-per- share price is fair. This was about right for the standalone express business.”
UPS Takeover View
UPS seeks a minimum acceptance rate of 80 percent of shareholders. TNT’s management and supervisory boards recommend accepting the deal, they said. TNT was spun off in May from the Dutch postal operator, PostNL NV (PNL), which is still the largest owner. PostNL said today it will tender its 29.8 percent stake.
At 9.50 euros a share, the deal values TNT at 13 times its last four quarters’ earnings before interest, taxes, depreciation and amortization, compared with a median of 10 times trailing Ebitda in nine other similar deals, according to data compiled by Bloomberg.
“The offer is disappointingly low,” said Andre Mulder, an Amsterdam-based Kepler Capital Markets analyst, who rates TNT as buy. “If you compare it to the price when the company was split off last May, it’s only a few tenths of cents higher. I do expect some of the shareholders to say that this isn’t really a premium.”
A bid by UPS or FedEx Corp. (FDX) had long been fodder for industry speculation as the U.S. companies studied expansion in Europe. TNT Chairman Antony Burgmans said today a counterbid from FedEx was “highly unlikely.” FedEx doesn’t comment on competitors, said Baerbel Bussenius, a spokeswoman in Brussels.
Job Cuts
UPS doesn’t rule out cutting jobs at TNT, Chief Executive Officer Scott Davis said at a press conference today in Amsterdam, adding that the company looks “to attrition first before we have forced redundancies.”
While UPS intends to retain the Cologne-Bonn airport as its main air cargo hub in Europe, the company has no plans to shut TNT’s Liege facility, which employs 1,400 people, Davis said. UPS will cease to use the TNT brand in the long term, he said.
UPS has an AA- rating from Standard & Poor’s and an Aa3 grade from Moody’s Investors Service. That’s the fourth-highest investment level in both cases. UPS, known for its brown vans and trucks, has $13.3 billion in bonds and loan facilities outstanding, of which $2.3 billion falls due this year, according to data compiled by Bloomberg. Its debt burden is the same size as a year ago, the data show.
Biggest Purchase
Buying TNT will be UPS’s biggest purchase since UPS was founded in 1907 as a bicycle-messenger service. The deal tops the 2005 acquisition of Overnite Corp. (OVNT) for about $1.25 billion in cash, which gave UPS the ability to make U.S. land shipments of parcels too large to be lifted by a driver.
International packages generate the most revenue for UPS, at $19.30 each in 2011, compared with $9.30 per domestic parcel. The $12.2 billion in sales for that business last year was 23 percent of UPS’s $53.1 billion total, which the company doesn’t disclose on a regional or country-by-country basis. Following the TNT purchase, international revenue will rise to 36 percent of overall sales, UPS said today.
TNT, which employs 77,500 people and whose name derives from the postwar Australian company Thomas Nationwide Transport, sold its Indian domestic road business in December and has been hurt by costs from revamping unprofitable Brazilian operations.
“The strength of TNT is as a European franchise,” CEO Marie-Christine Lombard said at the Amsterdam press conference. “We’ve always missed the U.S. link; it was a well-known issue for us. This combination will benefit our customer base by being able to offer a U.S. capability.”
The company has a 570 million euro revolving loan facility, which hadn’t been drawn down as of Dec. 31, and no bonds, according to data compiled by Bloomberg. It has a BBB+ credit rating from Standard & Poor’s, the eighth-highest grade, while Moody’s Investors Service rates it a level lower at Baa2.
Morgan Stanley (MS), UBS AG (UBSN) and Bank of America’s Merrill Lynch unit were financial advisers for UPS. TNT Express worked with Goldman Sachs Group Inc. (GS) and Lazard Ltd. (LAZ) advised the Dutch company’s supervisory board. Freshfields Bruckhaus Deringer LLP (1002L) was UPS’s legal adviser and Allen & Overy LLP (323556L) worked with TNT.
he Federal Reserve corrected errors in loan-loss estimates for financial firms including Citigroup Inc. (C) in a stress test of capital during a hypothetical economic slump.
The revised calculations don’t affect capital ratios that determined whether the banks passed or failed, the Fed said in a March 16 statement. In the test of Citigroup, an estimate for losses on first-lien mortgages in a stressed scenario was decreased by $400 million to $8.9 billion, while the estimate for losses on “other loans” was increased by the same amount to $4.8 billion.
The Fed required financial firms with more than $50 billion in assets to submit capital plans that would demonstrate whether the industry can withstand another crisis. U.S. banks deemed strong enough, including JPMorgan Chase & Co., were cleared to raise dividends and repurchase shares.
Citigroup was among four firms whose plans the Fed rejected March 13 after the central bank estimated that, under the New York-based lender’s proposal, it might fall short of requirements in a stressed scenario.
The Fed also changed calculations for Charlotte, North Carolina-based Bank of America Corp. (BAC), Ally Financial Inc., Wells Fargo & Co. (WFC) and MetLife Inc. (MET)
The central bank, in some cases, reduced loss estimates for first- and second-lien mortgages, and then specified that the numbers it provided were for domestic loans only. Projected losses on Citigroup’s home equity lines of credit, using that methodology, declined $100 million to $5.9 billion.
International Real Estate
Losses on other loans, which include international real estate, increased $100 million to $1.8 billion for Bank of America. The loss rate on first-lien mortgages for Detroit-based Ally, the largest U.S. auto lender, dropped to 6 percent from 6.1 percent.
The loss rate on other loans in a stressed scenario declined to 1.9 percent from 2.1 percent at Bank of America; 2.5 percent from 3 percent at Ally; 2.8 percent from 3.8 percent at Citigroup; 1.6 percent from 2 percent at MetLife; and 2.1 percent from 2.2 percent at San Francisco-based Wells Fargo.
The rate of total loan losses at New York-based MetLife, the biggest U.S. life insurer, fell to 1.4 percent from 1.6 percent.
Ally, MetLife and Atlanta-based SunTrust Banks Inc. joined Citigroup as the only firms out of 19 to fail part of the stress tests by at least one capital measure, according to Fed data released March 13. Citigroup, Ally and SunTrust have said they will resubmit capital plans. MetLife is winding down its banking business and has said it remains committed to returning funds to shareholders.
The revised calculations don’t affect capital ratios that determined whether the banks passed or failed, the Fed said in a March 16 statement. In the test of Citigroup, an estimate for losses on first-lien mortgages in a stressed scenario was decreased by $400 million to $8.9 billion, while the estimate for losses on “other loans” was increased by the same amount to $4.8 billion.
The Fed required financial firms with more than $50 billion in assets to submit capital plans that would demonstrate whether the industry can withstand another crisis. U.S. banks deemed strong enough, including JPMorgan Chase & Co., were cleared to raise dividends and repurchase shares.
Citigroup was among four firms whose plans the Fed rejected March 13 after the central bank estimated that, under the New York-based lender’s proposal, it might fall short of requirements in a stressed scenario.
The Fed also changed calculations for Charlotte, North Carolina-based Bank of America Corp. (BAC), Ally Financial Inc., Wells Fargo & Co. (WFC) and MetLife Inc. (MET)
The central bank, in some cases, reduced loss estimates for first- and second-lien mortgages, and then specified that the numbers it provided were for domestic loans only. Projected losses on Citigroup’s home equity lines of credit, using that methodology, declined $100 million to $5.9 billion.
International Real Estate
Losses on other loans, which include international real estate, increased $100 million to $1.8 billion for Bank of America. The loss rate on first-lien mortgages for Detroit-based Ally, the largest U.S. auto lender, dropped to 6 percent from 6.1 percent.
The loss rate on other loans in a stressed scenario declined to 1.9 percent from 2.1 percent at Bank of America; 2.5 percent from 3 percent at Ally; 2.8 percent from 3.8 percent at Citigroup; 1.6 percent from 2 percent at MetLife; and 2.1 percent from 2.2 percent at San Francisco-based Wells Fargo.
The rate of total loan losses at New York-based MetLife, the biggest U.S. life insurer, fell to 1.4 percent from 1.6 percent.
Ally, MetLife and Atlanta-based SunTrust Banks Inc. joined Citigroup as the only firms out of 19 to fail part of the stress tests by at least one capital measure, according to Fed data released March 13. Citigroup, Ally and SunTrust have said they will resubmit capital plans. MetLife is winding down its banking business and has said it remains committed to returning funds to shareholders.
Wednesday, March 14, 2012
Italy in recession, headache for Prime Minister Monti
Wednesday, March 14, 2012
0
ROME (Reuters) - Italy is in recession, final data confirmed on Monday, underscoring the difficulties facing Mario Monti's technocrat government as it grapples with a shrinking economy dragged down by austerity measures and a debt crisis.
Italy's economy shrank 0.7 percent in the fourth quarter of 2011, following a 0.2 percent decline in gross domestic product in the third quarter.
Monti, who rushed through a 33 billion euro austerity plan in December and is now working on reforms to boost growth, is due to meet Germany's Chancellor Angela Merkel on Tuesday for talks in Rome.
Germany's economy contracted by 0.2 percent in the fourth quarter, but analysts are expecting Europe's largest economy to pick up steam again this year, while Italy is seen lagging.
Weak consumption in the euro zone's third largest economy weighed heavily in the fourth quarter, while investments and inventories also declined but net exports contributed positively.
"Domestic demand is the weakest link, the area hardest hit by fiscal tightening," said Paolo Mameli from Intesa Sanpaolo, who said GDP would likely decline by a similar rate in the first quarter of 2012.
Italy's national statistics office ISTAT said GDP fell 0.4 percent year-on-year in the fourth quarter, revising a preliminary estimate of a 0.5 percent fall.
The data lagged a euro zone average of -0.3 percent quarter on quarter and 0.7 percent year-on-year. Economic indicators are pointing to a further slowdown for most of 2012 in Italy, which has been the most sluggish economy in the euro zone over the last decade.
The Organisation for Economic Co-operation and Development said on Monday there were tentative signs of economic improvement in the euro zone.
Analysts polled by Reuters in January expected GDP to shrink by about 0.6 percent in the first quarter of this year.
Data last week showed industrial output was much weaker than expected in January, plunging 2.5 percent and marking an extremely poor start to the year.
The Bank of Italy forecasts a 1.5 percent full-year contraction in 2012, far steeper than the government's official projection of -0.4 percent.
Monti's austerity measures including spending cuts, tax hikes and pension reform and are aimed at balancing the budget in 2013, though critics say they will weigh on Italy's already chronically low growth rates.
Market concerns about the sustainability of the country's 1.9 trillion euro public debt have calmed since Monti replaced Silvio Berlusconi in November and yields on Italy's 10 year bonds have fallen to below 5 percent from peaks close to 8 percent at the end of 2011.
Monti is now working on measures to stimulate the economy, and his government is due to meet with unions and employers on Monday to discuss a labor market reform to follow deregulation measures announced in January.
Italy's economy shrank 0.7 percent in the fourth quarter of 2011, following a 0.2 percent decline in gross domestic product in the third quarter.
Monti, who rushed through a 33 billion euro austerity plan in December and is now working on reforms to boost growth, is due to meet Germany's Chancellor Angela Merkel on Tuesday for talks in Rome.
Germany's economy contracted by 0.2 percent in the fourth quarter, but analysts are expecting Europe's largest economy to pick up steam again this year, while Italy is seen lagging.
Weak consumption in the euro zone's third largest economy weighed heavily in the fourth quarter, while investments and inventories also declined but net exports contributed positively.
"Domestic demand is the weakest link, the area hardest hit by fiscal tightening," said Paolo Mameli from Intesa Sanpaolo, who said GDP would likely decline by a similar rate in the first quarter of 2012.
Italy's national statistics office ISTAT said GDP fell 0.4 percent year-on-year in the fourth quarter, revising a preliminary estimate of a 0.5 percent fall.
The data lagged a euro zone average of -0.3 percent quarter on quarter and 0.7 percent year-on-year. Economic indicators are pointing to a further slowdown for most of 2012 in Italy, which has been the most sluggish economy in the euro zone over the last decade.
The Organisation for Economic Co-operation and Development said on Monday there were tentative signs of economic improvement in the euro zone.
Analysts polled by Reuters in January expected GDP to shrink by about 0.6 percent in the first quarter of this year.
Data last week showed industrial output was much weaker than expected in January, plunging 2.5 percent and marking an extremely poor start to the year.
The Bank of Italy forecasts a 1.5 percent full-year contraction in 2012, far steeper than the government's official projection of -0.4 percent.
Monti's austerity measures including spending cuts, tax hikes and pension reform and are aimed at balancing the budget in 2013, though critics say they will weigh on Italy's already chronically low growth rates.
Market concerns about the sustainability of the country's 1.9 trillion euro public debt have calmed since Monti replaced Silvio Berlusconi in November and yields on Italy's 10 year bonds have fallen to below 5 percent from peaks close to 8 percent at the end of 2011.
Monti is now working on measures to stimulate the economy, and his government is due to meet with unions and employers on Monday to discuss a labor market reform to follow deregulation measures announced in January.
Citigroup, SunTrust Banks Capital Plans Fail Fed Stress Tests
Citigroup Inc. (C), the lender that took the most government aid during the financial crisis, will try again to win approval for its capital plan after failing to meet minimum standards in U.S. stress tests.
The Federal Reserve objected yesterday to Citigroup’s plan -- which may have included a request for a higher dividend -- prompting the bank to say it will submit a revised version later this year. SunTrust Banks Inc. (STI), Ally Financial Inc. and MetLife Inc. (MET) also fell short in the Fed’s test of how 19 of the nation’s biggest lenders would fare in a severe economic slump.
Enlarge image Citi
Citigroup Center in New York. Photographer: Daniel Acker/Bloomberg
Stress Test Failure Isn't so Bad for Citigroup
Play Video
March 14 (Bloomberg) -- Bloomberg's Erik Schatzker reports on Citigroup failing the Federal Reserve's stress test and how it may not be such a bad thing for the company. He speaks on Bloomberg Television's Inside Track." (Source: Bloomberg)
Results of Fed Bank Stress Tests
Play Video
March 13 (Bloomberg) -- The Federal Reserve said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Citigroup Inc., SunTrust Banks Inc., MetLife Inc. and Ally Financial Inc. failed to meet the Fed's minimum requirements. Betty Liu, Julie Hyman, Michael McKee, Adam Johnson and Stephanie Ruhle, report on Bloomberg Television's "Street Smart." (Source: Bloomberg)
William Cohan on Fed Bank Stress Test Results
Play Video
March 13 (Bloomberg) -- Bloomberg View columnist William Cohan talks about the results of the Federal Reserve's bank stress tests. The Fed said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario. Cohan speaks with Stephanie Ruhle, Betty Liu, Adam Johnson and Michael McKee on Bloomberg Television's "Street Smart." (Cohan is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)
FBR's Miller on Fed Bank Stress Test Results
Play Video
March 13 (Bloomberg) -- Paul Miller, an analyst at FBR Capital Markets, talks about the results of the Federal Reserve's bank stress tests. The Fed said 15 of 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Miller speaks with Stephanie Ruhle, Betty Liu and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Breaking Down the Stress Test Failures
Play Video
March 14 (Bloomberg) -- Bloomberg's Julie Hyman reports on the 4 of the 19 banks that failed the Federal Reserve's bank stress test including Ally, SunTrust, Citigroup and MetLife. She speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)
“Investors are going to be disappointed,” said Michael Shemi, a director at Christofferson, Robb & Co., a New York- based investment firm with about $1.5 billion under management, referring to Citigroup. “Citi appears to have been too aggressive with their capital plans.”
The results are a blow to Chief Executive Officer Vikram Pandit, who has told investors the New York-based bank is ready to return capital to shareholders after slashing the dividend during the financial crisis. Capital plans submitted for the tests typically involve requests for higher dividends and share buybacks, which the Fed allowed for JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC)
Citigroup fell 2.9 percent to $35.41 at 10:02 a.m. in New York, the biggest drop on the 24-company KBW Bank Index. JPMorgan, which jumped 7 percent yesterday, was down 0.2 percent, and Wells Fargo declined 0.7 percent.
Pandit scrapped Citigroup’s dividend in 2009 as part of the company’s $45 billion bailout, which was later repaid. He reinstated a 1-cent payout last year and has been selling riskier assets to rebuild the bank’s strength. The Fed didn’t object to keeping the current quarterly payout, Citigroup said.
Ally’s Setback
The tests may also set back Ally, the Detroit-based auto and home lender rescued by taxpayers, which had planned an initial public offering to repay its bailout. Ally, run by CEO Michael Carpenter, and SunTrust, led by CEO William H. Rogers, said they will submit revised plans.
The Fed is testing to see how the capital of U.S. banks might hold up through a deep recession and a second housing crisis. The scrutiny focused on variables such as trading and counterparty losses and write-offs on credit cards and first- lien mortgages. Most of the 19 banks passed.
Disclosure of stress-test results in May 2009 boosted confidence in the financial system by giving investors more certainty on the maximum losses firms might sustain, and bank stocks beat the Standard & Poor’s 500 Index in the next 12 months. The KBW Bank Index (BKX) jumped 4.6 percent yesterday after JPMorgan, the biggest U.S. lender, announced it had passed the test and was raising its dividend 20 percent.
Analytical Gaps
The average estimate of six analysts surveyed by Bloomberg was for Citigroup to increase its payout to 28 cents this year from 3 cents. They projected the bank would buy back about $2.18 billion in shares, or 2.2 percent of the total, after making no repurchases last year.
Shannon Bell, a spokeswoman for Citigroup, declined to comment on what was in the capital plan. Ally said in an e- mailed statement that the Fed’s analysis overstated some risks and didn’t account for some of the auto and home lender’s financial and management resources.
Citigroup’s projected Tier 1 common capital ratio fell to 4.9 percent, below the central bank’s minimum requirement of 5 percent, in a test estimating the effects of a severe economic slump, according to data released by the Fed. Citigroup would surpass the threshold if the bank didn’t pursue a dividend increase or share buyback, according to the Fed’s data.
Orphaned Assets
Citigroup still has more than $200 billion of unwanted assets in the Citi Holdings unit, including more than $100 billion of mortgages, according to a filing.
“We continue to have the same goals that I mentioned before, which is that this will be the year that we’ll start returning capital,” Pandit told analysts on Jan. 17.
Ally has benefited from $17.2 billion of federal aid, which it needed after losses swelled on subprime home mortgages made by its Residential Capital mortgage subsidiary. A statement e- mailed by Gina Proia, a spokeswoman for Ally, said the Fed’s analysis “dramatically overstates potential contingent mortgage risk, especially with respect to newer vintages of loans.”
The tests also didn’t give enough credit for “management’s track record” and commitment to addressing the mortgage risks, and doesn’t “adequately contemplate contingent capital that already exists,” according to the statement.
The U.S. Treasury holds $5.9 billion of preferred shares that must be converted into common equity no later than Dec. 30, 2016, according to the lender’s annual securities filing.
ResCap’s Fate
Ally has considered putting the ResCap unit into bankruptcy, people familiar with the matter have said. Once known as GMAC when it was part of General Motors Co., Ally remains one of the biggest auto lenders and has profited from a recovery in car sales. The U.S. gained a 74 percent stake in the company in return for rescuing Ally in 2008.
“They’ve done a lot less capital-raising than others,” said Kirk Ludtke, an analyst at Stamford, Connecticut-based CRT Capital Group LLC. Ally’s capital plan may include additional contributions to ResCap, he said.
SunTrust’s Tier 1 common capital ratio would fall to 4.8 percent if the Atlanta-based lender carried out capital plans submitted to the Fed, according to the test results. Capital plans can include dividend payouts, stock repurchases and share sales. Ally’s ratio was estimated at 2.5 percent, regardless of any capital actions it proposed, according to Fed data.
SunTrust, ranked eighth in the U.S. by deposits, said it would have met Federal Reserve standards without the plan for capital actions that the lender submitted to the regulator. Distributing dividends and share buybacks tend to weaken performance on the tests by draining capital.
Housing Loans
The lender amassed losses amid a housing slump in the nation’s Southeast. After posting profits of more than $1 billion annually before 2008, the company booked a $1.56 billion loss in 2009 as write-offs surged.
About 27 percent of SunTrust’s residential construction loans and 29 percent of its residential mortgages were concentrated in Florida, which suffered some of the worst mortgage defaults during the financial crisis.
“I don’t think these stress tests are about who needs more capital,” said Michael Rose, an analyst with Raymond James & Associates Inc. “Clearly it’s about who can return capital. So maybe what they asked for might have been a little aggressive.”
Rose, who rates the shares “outperform,” said he’d been expecting SunTrust to double its 5-cent quarterly dividend. “It’s not like they failed by a wide margin,” he said, calling the test’s scenario “onerous” and “probably unrealistic.”
MetLife’s Results
MetLife’s total risk-based capital ratio would be 6 percent, compared with the minimum acceptable level of 8 percent, the Fed said as part of its review of how companies would withstand a “stress scenario.”
The insurer had requested approval for $2 billion in share repurchases and an increase of its annual dividend to $1.10 a share from 74 cents, according to a statement from the New York- based company. MetLife, which is overseen by the Fed because of its banking operations, was prevented by the regulator last year from increasing its dividend.
Excess Capital
CEO Steven Kandarian is winding down the banking business and said he expects the firm to have as much as $7 billion of excess capital by the end of this year. Kandarian said he remains “fully committed” to returning funds to shareholders, and that MetLife is on track to stop being a bank holding company by the middle of this year.
“At the end of the day this is an insurance company,” said Edward Shields, an analyst at Sandler O’Neill & Partners LP. MetLife’s inclusion in the Fed test is “like putting a square peg into a round hole.”
Fifth Third Bancorp (FITB), the Cincinnati-based lender, said the Fed objected to increases in its 8-cent quarterly dividend and some common share buybacks. The government didn’t object to its redemption of as much as $1.4 billion in certain trust-preferred securities.
The Federal Reserve objected yesterday to Citigroup’s plan -- which may have included a request for a higher dividend -- prompting the bank to say it will submit a revised version later this year. SunTrust Banks Inc. (STI), Ally Financial Inc. and MetLife Inc. (MET) also fell short in the Fed’s test of how 19 of the nation’s biggest lenders would fare in a severe economic slump.
Enlarge image Citi
Citigroup Center in New York. Photographer: Daniel Acker/Bloomberg
Stress Test Failure Isn't so Bad for Citigroup
Play Video
March 14 (Bloomberg) -- Bloomberg's Erik Schatzker reports on Citigroup failing the Federal Reserve's stress test and how it may not be such a bad thing for the company. He speaks on Bloomberg Television's Inside Track." (Source: Bloomberg)
Results of Fed Bank Stress Tests
Play Video
March 13 (Bloomberg) -- The Federal Reserve said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Citigroup Inc., SunTrust Banks Inc., MetLife Inc. and Ally Financial Inc. failed to meet the Fed's minimum requirements. Betty Liu, Julie Hyman, Michael McKee, Adam Johnson and Stephanie Ruhle, report on Bloomberg Television's "Street Smart." (Source: Bloomberg)
William Cohan on Fed Bank Stress Test Results
Play Video
March 13 (Bloomberg) -- Bloomberg View columnist William Cohan talks about the results of the Federal Reserve's bank stress tests. The Fed said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario. Cohan speaks with Stephanie Ruhle, Betty Liu, Adam Johnson and Michael McKee on Bloomberg Television's "Street Smart." (Cohan is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)
FBR's Miller on Fed Bank Stress Test Results
Play Video
March 13 (Bloomberg) -- Paul Miller, an analyst at FBR Capital Markets, talks about the results of the Federal Reserve's bank stress tests. The Fed said 15 of 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Miller speaks with Stephanie Ruhle, Betty Liu and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Breaking Down the Stress Test Failures
Play Video
March 14 (Bloomberg) -- Bloomberg's Julie Hyman reports on the 4 of the 19 banks that failed the Federal Reserve's bank stress test including Ally, SunTrust, Citigroup and MetLife. She speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)
“Investors are going to be disappointed,” said Michael Shemi, a director at Christofferson, Robb & Co., a New York- based investment firm with about $1.5 billion under management, referring to Citigroup. “Citi appears to have been too aggressive with their capital plans.”
The results are a blow to Chief Executive Officer Vikram Pandit, who has told investors the New York-based bank is ready to return capital to shareholders after slashing the dividend during the financial crisis. Capital plans submitted for the tests typically involve requests for higher dividends and share buybacks, which the Fed allowed for JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC)
Citigroup fell 2.9 percent to $35.41 at 10:02 a.m. in New York, the biggest drop on the 24-company KBW Bank Index. JPMorgan, which jumped 7 percent yesterday, was down 0.2 percent, and Wells Fargo declined 0.7 percent.
Pandit scrapped Citigroup’s dividend in 2009 as part of the company’s $45 billion bailout, which was later repaid. He reinstated a 1-cent payout last year and has been selling riskier assets to rebuild the bank’s strength. The Fed didn’t object to keeping the current quarterly payout, Citigroup said.
Ally’s Setback
The tests may also set back Ally, the Detroit-based auto and home lender rescued by taxpayers, which had planned an initial public offering to repay its bailout. Ally, run by CEO Michael Carpenter, and SunTrust, led by CEO William H. Rogers, said they will submit revised plans.
The Fed is testing to see how the capital of U.S. banks might hold up through a deep recession and a second housing crisis. The scrutiny focused on variables such as trading and counterparty losses and write-offs on credit cards and first- lien mortgages. Most of the 19 banks passed.
Disclosure of stress-test results in May 2009 boosted confidence in the financial system by giving investors more certainty on the maximum losses firms might sustain, and bank stocks beat the Standard & Poor’s 500 Index in the next 12 months. The KBW Bank Index (BKX) jumped 4.6 percent yesterday after JPMorgan, the biggest U.S. lender, announced it had passed the test and was raising its dividend 20 percent.
Analytical Gaps
The average estimate of six analysts surveyed by Bloomberg was for Citigroup to increase its payout to 28 cents this year from 3 cents. They projected the bank would buy back about $2.18 billion in shares, or 2.2 percent of the total, after making no repurchases last year.
Shannon Bell, a spokeswoman for Citigroup, declined to comment on what was in the capital plan. Ally said in an e- mailed statement that the Fed’s analysis overstated some risks and didn’t account for some of the auto and home lender’s financial and management resources.
Citigroup’s projected Tier 1 common capital ratio fell to 4.9 percent, below the central bank’s minimum requirement of 5 percent, in a test estimating the effects of a severe economic slump, according to data released by the Fed. Citigroup would surpass the threshold if the bank didn’t pursue a dividend increase or share buyback, according to the Fed’s data.
Orphaned Assets
Citigroup still has more than $200 billion of unwanted assets in the Citi Holdings unit, including more than $100 billion of mortgages, according to a filing.
“We continue to have the same goals that I mentioned before, which is that this will be the year that we’ll start returning capital,” Pandit told analysts on Jan. 17.
Ally has benefited from $17.2 billion of federal aid, which it needed after losses swelled on subprime home mortgages made by its Residential Capital mortgage subsidiary. A statement e- mailed by Gina Proia, a spokeswoman for Ally, said the Fed’s analysis “dramatically overstates potential contingent mortgage risk, especially with respect to newer vintages of loans.”
The tests also didn’t give enough credit for “management’s track record” and commitment to addressing the mortgage risks, and doesn’t “adequately contemplate contingent capital that already exists,” according to the statement.
The U.S. Treasury holds $5.9 billion of preferred shares that must be converted into common equity no later than Dec. 30, 2016, according to the lender’s annual securities filing.
ResCap’s Fate
Ally has considered putting the ResCap unit into bankruptcy, people familiar with the matter have said. Once known as GMAC when it was part of General Motors Co., Ally remains one of the biggest auto lenders and has profited from a recovery in car sales. The U.S. gained a 74 percent stake in the company in return for rescuing Ally in 2008.
“They’ve done a lot less capital-raising than others,” said Kirk Ludtke, an analyst at Stamford, Connecticut-based CRT Capital Group LLC. Ally’s capital plan may include additional contributions to ResCap, he said.
SunTrust’s Tier 1 common capital ratio would fall to 4.8 percent if the Atlanta-based lender carried out capital plans submitted to the Fed, according to the test results. Capital plans can include dividend payouts, stock repurchases and share sales. Ally’s ratio was estimated at 2.5 percent, regardless of any capital actions it proposed, according to Fed data.
SunTrust, ranked eighth in the U.S. by deposits, said it would have met Federal Reserve standards without the plan for capital actions that the lender submitted to the regulator. Distributing dividends and share buybacks tend to weaken performance on the tests by draining capital.
Housing Loans
The lender amassed losses amid a housing slump in the nation’s Southeast. After posting profits of more than $1 billion annually before 2008, the company booked a $1.56 billion loss in 2009 as write-offs surged.
About 27 percent of SunTrust’s residential construction loans and 29 percent of its residential mortgages were concentrated in Florida, which suffered some of the worst mortgage defaults during the financial crisis.
“I don’t think these stress tests are about who needs more capital,” said Michael Rose, an analyst with Raymond James & Associates Inc. “Clearly it’s about who can return capital. So maybe what they asked for might have been a little aggressive.”
Rose, who rates the shares “outperform,” said he’d been expecting SunTrust to double its 5-cent quarterly dividend. “It’s not like they failed by a wide margin,” he said, calling the test’s scenario “onerous” and “probably unrealistic.”
MetLife’s Results
MetLife’s total risk-based capital ratio would be 6 percent, compared with the minimum acceptable level of 8 percent, the Fed said as part of its review of how companies would withstand a “stress scenario.”
The insurer had requested approval for $2 billion in share repurchases and an increase of its annual dividend to $1.10 a share from 74 cents, according to a statement from the New York- based company. MetLife, which is overseen by the Fed because of its banking operations, was prevented by the regulator last year from increasing its dividend.
Excess Capital
CEO Steven Kandarian is winding down the banking business and said he expects the firm to have as much as $7 billion of excess capital by the end of this year. Kandarian said he remains “fully committed” to returning funds to shareholders, and that MetLife is on track to stop being a bank holding company by the middle of this year.
“At the end of the day this is an insurance company,” said Edward Shields, an analyst at Sandler O’Neill & Partners LP. MetLife’s inclusion in the Fed test is “like putting a square peg into a round hole.”
Fifth Third Bancorp (FITB), the Cincinnati-based lender, said the Fed objected to increases in its 8-cent quarterly dividend and some common share buybacks. The government didn’t object to its redemption of as much as $1.4 billion in certain trust-preferred securities.
The resilience of the largest U.S. financial firms when tested against a recession more severe than the last one shows regulators have succeeded in pushing banks to build fortress-like balance sheets.
Enlarge image JPMorgan Chase
The Fed yesterday said 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock. Those results were due to scrutiny by the Fed on capital payouts over the past three years, the central bank said.
Regulators, empowered by the Dodd-Frank Act and goaded by criticism for failing to spot the subprime mortgage debacle, have redesigned their approach to bank supervision. They now place greater emphasis on systemic risk as they seek to avoid a repeat of the crisis that resulted in a $245 billion taxpayer bailout of banks through the Troubled Asset Relief Program.
“Any bank that remains adequately capitalized under these acute stress scenarios is not just strong but also darn-near impregnable,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm, whose clients have included Wells Fargo & Co. (WFC) “What’s a bank for is at the heart of this question: Is it to be Fort Knox?”
JPMorgan Chase & Co. (JPM) and Wells Fargo joined banks raising dividends and authorizing share repurchases after passing the stress tests. Citigroup Inc. (C), the lender that took the most government aid during the financial crisis, said it will resubmit its capital plan to regulators after failing to meet some minimum standards in the tests. Citigroup has repaid $45 billion in TARP money.
Falling Short
SunTrust Banks Inc., Ally Financial Inc. and MetLife Inc. (MET) also fell short by at least one measure under the central bank’s worst-case scenario. Ally also intends to resubmit its plan, the company said in a statement.
Stocks rose, sending the Dow Jones Industrial (DJIA) Average to the highest level since 2007, after the JPMorgan Chase said it will increase its quarterly dividend 20 percent and as the Fed raised its assessment of the economy.
The Standard & Poor’s 500 Index added 1.8 percent to 1,395.95 at 4 p.m. New York time yesterday, and the Dow climbed 217.97 points, or 1.7 percent, to 13,177.68. Yields on 10-year Treasuries advanced a fifth day, reaching 2.13 percent.
The KBW Bank Index (BKX), which tracks shares of 24 of the largest U.S. banks, rose 4.6 percent. The index is up 21 percent this year on expectations of stronger economic growth and improving profits. Concern that the nation’s banks may be damaged by Europe’s debt crisis helped drive down the index 25 percent in 2011, its worst annual performance since 2008.
Adequate Capital
The Fed tested the banks to ensure that they have adequate capital to continue lending in a downturn. The test assumed an unemployment rate of 13 percent -- compared with a peak of 10 percent as a result of the 18-month recession that ended in June 2009 -- a 50 percent drop in stock prices and a 21 percent decline in house prices. It showed that those circumstances would produce aggregate losses of $534 billion over nine quarters.
Even with such a blow, the 19 banks would see their Tier 1 common capital ratio -- a measure of bank strength against loss -- fall to 6.3 percent in the fourth quarter of 2013, above the 5 percent minimum the Fed required. The ratio was 10.1 percent in the third quarter of last year.
‘Very Onerous’
The fact that most of the banks came through “this very onerous stress test” demonstrates “the strength of the U.S. banking system,” Gerard Cassidy, an analyst with RBC Capital Markets, said in an interview.
European banks’ reluctance to lend to one another fell yesterday to the lowest in seven months. The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, declined to its lowest since Aug. 5.
Banks are “much better capitalized” than during the 2008 financial crisis and “understand their balance sheet and loan portfolio much better,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst for FBR Capital Markets in Arlington, Virginia.
Bankers criticized the criteria the Fed used in the stress tests.
Frank Keating, president and chief executive officer of the American Bankers Association, said he objects “to testing bank capital under theoretical conditions that are far more severe than even those seen during ‘the Great Recession.’”
Ally Financial said in a statement that the central bank’s “analysis dramatically overstates potential contingent mortgage risk, especially with respect to newer vintages of loans.”
Tougher Standards
The Fed started the test and review of banks’ forward- looking capital strategy in November, saying they should have “credible plans” to meet tougher standards required by new regulations.
Banks “have sufficient capital to weather a severe storm,” said Ernest Patrikis, a partner at White & Case LLP and former general counsel at the Federal Reserve Bank of New York. “One question is whether they will have too much capital.”
Bank of America CEO Brian Moynihan and other executives have complained that carrying too much capital could restrict lending.
Of the $534 billion in total projected losses, $341 billion comes from loan-portfolio losses, the Fed said. Loans and trading portfolio and counterparty losses account for 85 percent of the total, the Fed said.
Six bank-holding companies with large trading, private equity and derivatives activities were also subjected to tests of these positions from a “global market shock.” The six were Citigroup, Bank of America Corp. (BAC), Wells Fargo, Morgan Stanley (MS), Goldman Sachs Group Inc. (GS) and JPMorgan Chase.
Better Positioned
“Some banks are better positioned than others, and you’re going to see them start to steal some market share and sort of separate themselves,” said William Fitzpatrick, a Milwaukee- based financial-services analyst at Manulife Asset Management, whose team oversees $800 million and invests in companies such as Citigroup, JPMorgan Chase and MetLife. “We’re going to see some separation between the winners and the ones that didn’t pass.”
The stress tests are now a standard feature of the Fed’s big-bank supervision and oversight of financial risk. The concept was born in late 2008 when Chairman Ben S. Bernanke was trying to discern the maximum losses facing the banking system following the collapse of Lehman Brothers Holdings Inc.
Focus on 19
The Fed’s focus on the l9 largest institutions’ capital management also reflects a wary attitude toward boards that paid out more than $43 billion in dividends as housing markets started to deteriorate in 2007, according to comments last year by Patrick Parkinson, the former director of the Fed’s Division of Banking Supervision and Regulation.
Citigroup’s proposed capital actions would leave the third- biggest bank with Tier 1 common capital of 4.9 percent, below the 5 percent minimum require by the regulators, according to yesterday’s results. Citigroup would meet the requirement only if it doesn’t change the amount of capital it returns to shareholders, the test results showed.
A senior Fed official said in a conference call with reporters that the central bank’s models showed higher estimated losses than those submitted by the banks, while declining to specify in what categories.
The results were originally due to be announced on March 15. The official said they were released early because of a possible inadvertent release of information. The official said JPMorgan Chase’s release was the result of miscommunication between the Fed and the bank, and didn’t cause the Fed’s accelerated release of the results
Enlarge image JPMorgan Chase
The Fed yesterday said 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock. Those results were due to scrutiny by the Fed on capital payouts over the past three years, the central bank said.
Regulators, empowered by the Dodd-Frank Act and goaded by criticism for failing to spot the subprime mortgage debacle, have redesigned their approach to bank supervision. They now place greater emphasis on systemic risk as they seek to avoid a repeat of the crisis that resulted in a $245 billion taxpayer bailout of banks through the Troubled Asset Relief Program.
“Any bank that remains adequately capitalized under these acute stress scenarios is not just strong but also darn-near impregnable,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm, whose clients have included Wells Fargo & Co. (WFC) “What’s a bank for is at the heart of this question: Is it to be Fort Knox?”
JPMorgan Chase & Co. (JPM) and Wells Fargo joined banks raising dividends and authorizing share repurchases after passing the stress tests. Citigroup Inc. (C), the lender that took the most government aid during the financial crisis, said it will resubmit its capital plan to regulators after failing to meet some minimum standards in the tests. Citigroup has repaid $45 billion in TARP money.
Falling Short
SunTrust Banks Inc., Ally Financial Inc. and MetLife Inc. (MET) also fell short by at least one measure under the central bank’s worst-case scenario. Ally also intends to resubmit its plan, the company said in a statement.
Stocks rose, sending the Dow Jones Industrial (DJIA) Average to the highest level since 2007, after the JPMorgan Chase said it will increase its quarterly dividend 20 percent and as the Fed raised its assessment of the economy.
The Standard & Poor’s 500 Index added 1.8 percent to 1,395.95 at 4 p.m. New York time yesterday, and the Dow climbed 217.97 points, or 1.7 percent, to 13,177.68. Yields on 10-year Treasuries advanced a fifth day, reaching 2.13 percent.
The KBW Bank Index (BKX), which tracks shares of 24 of the largest U.S. banks, rose 4.6 percent. The index is up 21 percent this year on expectations of stronger economic growth and improving profits. Concern that the nation’s banks may be damaged by Europe’s debt crisis helped drive down the index 25 percent in 2011, its worst annual performance since 2008.
Adequate Capital
The Fed tested the banks to ensure that they have adequate capital to continue lending in a downturn. The test assumed an unemployment rate of 13 percent -- compared with a peak of 10 percent as a result of the 18-month recession that ended in June 2009 -- a 50 percent drop in stock prices and a 21 percent decline in house prices. It showed that those circumstances would produce aggregate losses of $534 billion over nine quarters.
Even with such a blow, the 19 banks would see their Tier 1 common capital ratio -- a measure of bank strength against loss -- fall to 6.3 percent in the fourth quarter of 2013, above the 5 percent minimum the Fed required. The ratio was 10.1 percent in the third quarter of last year.
‘Very Onerous’
The fact that most of the banks came through “this very onerous stress test” demonstrates “the strength of the U.S. banking system,” Gerard Cassidy, an analyst with RBC Capital Markets, said in an interview.
European banks’ reluctance to lend to one another fell yesterday to the lowest in seven months. The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, declined to its lowest since Aug. 5.
Banks are “much better capitalized” than during the 2008 financial crisis and “understand their balance sheet and loan portfolio much better,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst for FBR Capital Markets in Arlington, Virginia.
Bankers criticized the criteria the Fed used in the stress tests.
Frank Keating, president and chief executive officer of the American Bankers Association, said he objects “to testing bank capital under theoretical conditions that are far more severe than even those seen during ‘the Great Recession.’”
Ally Financial said in a statement that the central bank’s “analysis dramatically overstates potential contingent mortgage risk, especially with respect to newer vintages of loans.”
Tougher Standards
The Fed started the test and review of banks’ forward- looking capital strategy in November, saying they should have “credible plans” to meet tougher standards required by new regulations.
Banks “have sufficient capital to weather a severe storm,” said Ernest Patrikis, a partner at White & Case LLP and former general counsel at the Federal Reserve Bank of New York. “One question is whether they will have too much capital.”
Bank of America CEO Brian Moynihan and other executives have complained that carrying too much capital could restrict lending.
Of the $534 billion in total projected losses, $341 billion comes from loan-portfolio losses, the Fed said. Loans and trading portfolio and counterparty losses account for 85 percent of the total, the Fed said.
Six bank-holding companies with large trading, private equity and derivatives activities were also subjected to tests of these positions from a “global market shock.” The six were Citigroup, Bank of America Corp. (BAC), Wells Fargo, Morgan Stanley (MS), Goldman Sachs Group Inc. (GS) and JPMorgan Chase.
Better Positioned
“Some banks are better positioned than others, and you’re going to see them start to steal some market share and sort of separate themselves,” said William Fitzpatrick, a Milwaukee- based financial-services analyst at Manulife Asset Management, whose team oversees $800 million and invests in companies such as Citigroup, JPMorgan Chase and MetLife. “We’re going to see some separation between the winners and the ones that didn’t pass.”
The stress tests are now a standard feature of the Fed’s big-bank supervision and oversight of financial risk. The concept was born in late 2008 when Chairman Ben S. Bernanke was trying to discern the maximum losses facing the banking system following the collapse of Lehman Brothers Holdings Inc.
Focus on 19
The Fed’s focus on the l9 largest institutions’ capital management also reflects a wary attitude toward boards that paid out more than $43 billion in dividends as housing markets started to deteriorate in 2007, according to comments last year by Patrick Parkinson, the former director of the Fed’s Division of Banking Supervision and Regulation.
Citigroup’s proposed capital actions would leave the third- biggest bank with Tier 1 common capital of 4.9 percent, below the 5 percent minimum require by the regulators, according to yesterday’s results. Citigroup would meet the requirement only if it doesn’t change the amount of capital it returns to shareholders, the test results showed.
A senior Fed official said in a conference call with reporters that the central bank’s models showed higher estimated losses than those submitted by the banks, while declining to specify in what categories.
The results were originally due to be announced on March 15. The official said they were released early because of a possible inadvertent release of information. The official said JPMorgan Chase’s release was the result of miscommunication between the Fed and the bank, and didn’t cause the Fed’s accelerated release of the results
Tuesday, March 13, 2012
Fed to Test 19 Banks’ Capital Against Recession Scenario
Tuesday, March 13, 2012
0
The Federal Reserve will show how the capital of 19 U.S. banks might fare through a deep recession and a second housing crisis when they unveil stress-test results in three days.
The tests will show results for revenues, capital ratios and profits or losses at each firm over a nine-quarter period, the Fed said in a paper released today in Washington. The results will be released at 4:30 p.m. on March 15. Templates included in the Fed release today showed an array of categories it plans to disclose, from trading and counterparty losses to credit cards and first-lien mortgages.
“Strong capital levels are critical to ensuring that banking organizations have the ability to lend and to continue to meet their financial obligations, even in times of economic difficulty,” the Fed said in a statement. “The supervisory stress scenario is not the Federal Reserve’s forecast for the economy, but was designed to represent an outcome that, while unlikely, may occur if the U.S economy were to experience a deep recession at the same time that economic activity in other major economies contracted significantly.”
The KBW Bank Index of 24 U.S. lenders has advanced 15 percent this year as investors bet a strengthening economy will help firms boost earnings. Concern that the nation’s banks may be damaged by Europe’s debt crisis helped drive down the index 25 percent in 2011, its worst annual performance since the 2008 credit crisis.
Lehman Brothers Collapse
Stress tests date back to 2009, when supervisors tried to determine the extent of losses facing the nation’s largest lenders following the collapse of Lehman Brothers Holdings Inc. (LEH) and the subsequent financial crisis. Gross domestic product contracted at an 8.9 annual rate in the fourth quarter of 2008.
For the current test, the Fed provided the banks with 25 variables, including estimates on gross domestic product, Treasury bill rates and indexes of consumer prices and home prices. The more severe scenario assumes an 8 percent drop in U.S. gross domestic product, an unemployment rate as high as 13 percent and a 21 percent drop in home prices.
Six banking-holding companies with large trading, private equity and derivatives activities were also subjected to tests of these positions from a “global market shock,” the Fed said. The six banks are Citigroup Inc. (C), Bank of America Corp. (BAC), Wells Fargo & Co., Morgan Stanley, Goldman Sachs Group Inc. (GS), and JPMorgan Chase & Co. (JPM)
The Fed said it estimated revenue and losses under the stress scenario based on detailed data provided by the firms and verified by supervisors. The Fed said the tests draw on the expertise “of hundreds of staff
Subscribe to:
Posts (Atom)
