Stress Tests: 10 Banks Need Cash

After the close of trading, the Fed released the results of the bank stress test.

19 banks were analyzed. Nine came out with no need to raise new capital, but 10 will. 

The banks that will have to raise the largest amount of capital are Bank of America (BAC - Analyst Report), Wells Fargo (WFC - Analyst Report) and GMAC (partially owned by General Motors (GM)).  The total for all 10 banks is $74.6 billion. 

This is after the effects of the “better than expected earnings” in the first quarter and other capital actions that the banks have already taken or announced, such as selling off assets, or in the case of Citigroup (C - Analyst Report), exchanging of TARP preferred shares into common stock.

Under the “more adverse” scenario (read, realistic scenario) the 19 bank holding companies (BHC) will suffer total losses during 2009 and 2010 of $600 billion.  $455 billion of these losses will come from whole loans held on the banks’ balance sheets and $135 billion will come from available for sale securities.  This is in addition to the losses that the BHC have already taken. 

To determine if banks need to raise more capital, they had to have projected tier one capital of 6% of assets at the end of 2010, and at least 4% has to be common equity (as opposed to preferred).

There are 2 parts to this, the resources other than capital to absorb losses, which is mostly the net revenues that the firms will be generating this year and next, and the capital actions. The non-capital resources will supposedly absorb $362.9 billion of losses. 

Even after allowing for the effects of the potential “earn out”, the losses would have been $185 billion.  Most of that difference is from Citigroup, which was able to knock its capital raise requirement down from $92.6 billion to just $5.5 billion.
 
The results also break out the expected losses by type of loan.

In total, the largest percentage losses are expected to be in credit cards, at 22.2%, although the range of expected lasses varies widely from company to company. SunTrust (STI - Snapshot Report) is the lowest at 17.4% , whereas KeyCorp (KEY - Analyst Report) is the highest at 39.9. 

The next “ugliest” group of loans are expected to be second mortgages at 13.8% overall.  Again there are huge variations in the expected loss rates, ranging from a low of 6.3% at KEY to a high of 21.2% at GMAC (lost another one at Ditech). 

The best loan class is expected to be commercial and industrial loans with total defaults of just 6.1%.  The loan category that overall looks far too low to me in terms of loss severities is Commercial Real Estate, with losses of 8.5% expected.

I will have a fuller analysis of this on Friday after I have had a chance to more fully digest the report.