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Banks' Reactions to Stress Tests

A sampling of the financial community's reactions to the May 7 release of the stress tests on the largest U.S. banks

On May 7, the Treasury Dept. released the outcome of its stress tests conducted on the 19 largest U.S. banks. The tests were designed to measure the banks' ability to meet capital requirements under two forward-looking scenarios for the economy—one representing the consensus forecast and the other reflecting a deeper-than-expected economic contraction. Here are excerpts from statements by banks and financial associations on the test results:

Bank of America (BAC)

Bank of America Corp. today said the Federal Reserve has notified it of the stress test results. The test shows that in order to weather two years of the most severe economic circumstance, Bank of America would need to increase Tier 1 common capital by $33.9 billion.

Bank of America executives emphasized that the test shows that the company is healthy and would continue to be, even under arduous economic conditions.

Under the stress test results, Bank of America's total Tier 1 Capital Ratio would remain above the federal regulatory target over the two-year period. Tier 1 common equity would be below the guideline, necessitating an increase in the company's common equity to meet the government's most adverse economic scenario.

"We are comfortable with our current capital position in the present economic environment," said Kenneth D. Lewis, Bank of America chief executive officer and president. "The stress test asks what if the economy does much worse than most experts project. We are working on a plan to submit to the government for such a contingency, which is due by June 8. While it would have a number of components, we will not need any new government money. The plan will be implemented by the Nov. 9 deadline."

"While we may differ on some elements of the test, we understand the need to reassure those doing business with or investing in the company that we will be well capitalized even in a highly adverse scenario," said Joe L. Price, chief financial officer. "Our capital plan will therefore reflect the Federal Reserve's conclusions. Our goal will be to continue to run the bank in a safe and sound manner but to minimize dilution of our common shareholders, while at the same time being positioned to continue to help the economy through appropriate extension of credit. Our strategy will also, even under the most adverse scenario, put the highest possible priority on paying back the taxpayers as soon as possible."

Price said that the company could increase the Tier 1 common ratio in a number of ways. He said the company intends to sell common stock and/or convert existing privately held preferred stock into common shares. Bank of America has already announced it will sell First Republic Bank and is considering the sale of several other business units including Columbia Management. It may also consider several joint ventures.

JPMorgan Chase (JPM)

JPMorgan Chase & Co. confirmed today that it has completed the U.S. Government's Supervisory Capital Assessment Program (SCAP), which determined that JPMorgan Chase's capital position would remain strong under far more highly stressed conditions than exist today, and that there is no need for the company to raise additional capital at this time.

JPMorgan Chase's existing strong capital base and loan-loss reserves, together with its significant pretax, pre-provision earnings power, would enable it to weather adverse scenarios envisioned by SCAP, while still maintaining very strong capital ratios. JPMC's ratios under SCAP would remain very strong even when excluding TARP preferred stock. Importantly, the company believes it could handle a substantially worse environment than the government's adverse conditions, even though the company is not expecting such a scenario.

Jamie Dimon, chairman and chief executive officer, said, "JPMorgan Chase has worked hard to maintain its fortress balance sheet and strong capital position in this challenging environment." He added, "We are committed to supporting healthy economic growth and to doing our part to help our country through these tough times. In particular, we remain committed to safe and sound lending and to being a responsible corporate citizen. In the first quarter of this year alone, JPMorgan Chase lent more than $150 billion to consumers, small businesses, nonprofits, municipalities, corporations and others."

Regions Financial (RF)

Under the adverse "what-if" scenario contemplated by the SCAP, Regions has committed to increase its common equity by $2.5 billion. This will strengthen Regions' current Tier 1 Common to risk-weighted asset ratio, which was 6.49% at Mar. 31, 2009, to a pro forma ratio of 8.7%, or more than twice the required 4% level.

Regions, along with its legal and financial advisers, is refining the details of a comprehensive Capital Plan that contemplates fully satisfying the $2.5 billion Tier 1 Common equity requirement without conversion of any existing Capital Purchase Program equity to Capital Assistance Program equity and without further investment by the U.S. Treasury in Regions. Sources of capital in the Capital Plan are expected to be entirely nongovernmental and to include (i) liability management strategies, and (ii) the issuance of common equity or securities convertible into common equity that satisfy the regulators' requirements in public and/or private transactions. Regions also may choose to sell selected noncore businesses or assets or take other actions to reduce its risk-weighted assets as part of the plan; however, sales of core businesses are not contemplated…

By the Federal Reserve's own definition, the assessment is a "what-if exercise" that does not assess the current condition of the 19 banks tested. Specifically, in disclosing its estimates today, the Federal Reserve said: "The estimates…represent a hypothetical 'what-if' scenario that involves an economic outcome that is more adverse than expected. These estimates are not forecasts of expected losses or revenues."

Regions believes that the SCAP results do not accurately reflect the loan losses that Regions is likely to experience even in the "more adverse" economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% on commercial real estate is sharply higher than both Regions' actual annualized loss ratio on this portfolio in the first quarter and sharply higher than that projected for the other banks. If Regions' projected cumulative two-year losses on this portfolio were at the 8.5% aggregate level for the 19 tested banks, the capital raise commitment would be approximately $500 million; if the projected cumulative losses were 50% higher than the bank's annualized first-quarter commercial real estate losses, Regions would not be required to raise capital.

Morgan Stanley (MS)

Morgan Stanley said today that, in anticipation of the closing of the firm's joint venture with Smith Barney and consistent with the firm's long-term capital plan, it has commenced a public offering of $2 billion of its common stock for sale to the public.

Morgan Stanley also said it intends to repay the U.S. Treasury's TARP investment as soon as possible from its strong Tier 1 capital reserves, pending the approval of its regulators. The firm said it believes it has more than sufficient Tier 1 capital to do so and anticipates completing shortly the required offerings of common equity and non-FDIC guaranteed debt.

Regarding the release today of the results of the Federal Reserve's Supervisory Capital Assessment Program, Morgan Stanley also noted that:

Morgan Stanley has one of the strongest capital positions in the industry, as measured by one of the highest Tier 1 capital ratios.

The Federal Reserve has asked Morgan Stanley to add $1.8 billion in common equity. Given the $2.7 billion impact on tangible common equity resulting from the closing of the Smith Barney joint venture, an increase in capital is consistent with the Firm's own long-term capital plan, and will be addressed by the $2 billion common stock offering announced today.

Morgan Stanley's capital position has been materially strengthened since the Dec. 31, 2008, test date evaluated by the Federal Reserve, as a result of a significant reduction in risk weighted assets which were $310.6 billion at Dec. 31, 2008, and now stand at $288.3 billion. The firm's even stronger capital position at the end of the first quarter includes:

Tier 1 Capital Ratio (Basel I) of 16.7%, up from 15.2% at the Dec. 31, 2008, test date

Tangible Common Equity to Risk Weighted Assets Ratio of 9.2%, up from 8.6% at the Dec. 31, 2008, test date.

The Federal Reserve's test results also reflect the composition of Morgan Stanley's strong capital position—between common equity and preferred—which has been driven primarily by the firm's interest in pursuing strategic investments that offer long-term benefits for Morgan Stanley's business (as the Firm did with Mitsubishi UFJ Financial Group and China Investment Corp.), rather than pursuing broad-based public offerings.

Wells Fargo (WFC)

Wells Fargo & Co. said today it is pleased that the Federal Reserve has confirmed that Wells Fargo has enough total capital even in a severe economic stress scenario. Both the company's and the Federal Reserve's analysis indicate the company would remain well above the 6% minimum Tier 1 capital ratio needed for well-capitalized banks over the next two years even under stress conditions. The Company's Tier 1 capital ratio as of Mar. 31, 2009, was 8.3% after a reduction of approximately 190 basis points for credit-related, purchase accounting write-downs taken by Wells Fargo upon the Wachovia acquisition.

The Federal Reserve requires that the preponderance of Tier 1 capital be maintained in common equity, which is defined as 4% of risk weighted assets for purposes of the stress test. The company's own projection of its downside risk under the stress-test scenario indicated sufficient Tier 1 common equity to meet this test, but the Federal Reserve has elected to apply its own more conservative revenue assumptions in the adverse case scenario and has asked Wells Fargo to increase Tier 1 common equity by $13.7 billion by Nov. 9, 2009.

"We're very pleased that the Federal Reserve's comprehensive credit analysis confirmed our own estimates of potential credit losses in the aggregate across all of our loan portfolios," said Chief Financial Officer Howard Atkins. "This is not surprising since the higher-risk Wachovia loan and securities portfolios have already been written down and since banking regulators have previously reviewed legacy Wells Fargo and legacy Wachovia credit portfolios while the company has reviewed Wachovia's loans at least five times since the Wachovia merger was announced.

"The main reason the Federal Reserve has required Wells Fargo to hold an extra $13.7 billion in Tier 1 common equity is based on what we believe is their excessively conservative estimate of pre-provision net revenue (PPNR) in the adverse scenario. Since we believe our company's earnings and other internally generated capital will generate enough capital to meet the 4% test by Nov. 9, 2009, in effect the Federal Reserve is asking Wells Fargo to hold a significant capital cushion above 4% for a hypothetical net revenue scenario that is remote and inconsistent with the company's strong actual results so far in 2009, strong underlying earnings momentum, and the actions already taken by Wells Fargo to reduce Wachovia's revenue risk.

Goldman Sachs (GS)

We are pleased that the Federal Reserve's Supervisory Capital Assessment Program has been completed. We view it as an important step to restoring investor confidence and financial stability.

As regulators have stated, underlying the stress test's methodology was a very conservative set of assumptions on potential revenues and losses in a more adverse market scenario than the already challenging environment.

With respect to Goldman Sachs, the test determined that the firm does not require further capital.

After a review of the repayment conditions issued by the Federal Reserve and the Treasury, we believe 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 Program.

Citigroup (C)

Citi announced today that it will expand its previously disclosed public exchange offers by $5.5 billion. This increase reflects the results of the U.S. government's Supervisory Capital Assessment Program (SCAP).

"The government's stress test was a rigorous process that assessed our capital and confirms our view that Citi's plans and actions will give it the financial strength to weather an adverse stress scenario" said Vikram Pandit, chief executive officer of Citi. "The results also reflect 15 months of continuous work, tough decisions, and steady execution towards a strong and stable Citi with a clear strategy for the future."

Citi will expand its public exchange offers previously announced on Feb. 27, 2009, by increasing the maximum amount of preferred securities and trust preferred securities that it will accept in exchange for common stock from $27.5 billion to $33 billion to further increase Tier 1 Common without any additional U.S. government investment or conversion of U.S. government securities into common shares. The conversion price of $3.25, the exchange factors and the priority of trust preferred securities accepted in the exchange offers will remain unchanged from the transaction terms as previously announced. (See attached transaction summary)

Consistent with the previous announcement, the U.S. government will continue to match the exchanges by public and private holders up to a maximum of $25 billion face value of its preferred stock at the same conversion price. The U.S. government will also continue to exchange the portion of its existing preferred securities that are not exchanged for common shares into new trust preferred securities with an annual coupon of 8%.

Citi said that it expects to launch the public exchange offers shortly after further SEC review of our S-4 and finalization of definitive agreements with the U.S. government reflecting the transaction terms previously agreed with the U.S. government.

This transaction could increase Tier 1 Common of the company from the first-quarter level of $22.1 billion to as much as $86.2 billion, which assumes the exchange of $33 billion of preferred securities and trust preferred securities, the maximum eligible under this transaction. Citi's TCE which was $30.9 billion on Mar. 31, 2009, will increase by as much as $60.4 billion to up to $91.3 billion.

Based on the maximum eligible conversion, the U.S. government would own approximately 34% of Citi's outstanding common stock, and existing shareholders would own approximately 24% of the outstanding common shares.


BB&T Corp. said today that its capital levels are more than sufficient and exceed the government's minimum stress test requirements under a "more adverse" economic scenario, according to a report issued by federal regulatory agencies following a rigorous forward-looking examination of the nation's 19 largest financial institutions. The findings confirmed that BB&T will not be required to raise additional capital.

Results of the stress test revealed that BB&T was one of nine large financial institutions sufficiently capitalized under a "more adverse" macroeconomic scenario projecting a prolonged and deepening recession using assumptions more severe than BB&T's estimates. The stress test results also revealed that BB&T surpassed minimum capital requirements for regulatory and tangible capital.

"Our capital levels have remained strong throughout this economic downturn, and we continue to lend to creditworthy borrowers in our markets, with loan originations exceeding $6 billion per month," said Chief Executive Officer Kelly King. "While we do face credit-related challenges, our own adverse-case scenario is more favorable than the government's stress-test results.

"Now that the stress test is behind us, we will proceed with efforts to implement a capital plan that accomplishes our three strategic objectives," said King. "First, we must remain a very well-capitalized financial institution throughout this credit cycle. We also want to repay the government's investment under the Capital Purchase Program as soon as possible. Finally, our strong capital position will help us take advantage of future opportunities on the other side of this economic correction."

PNC Financial (PNC)

The PNC Financial Services Group, Inc. today announced that it plans to satisfy the requirement to increase common shareholders' equity by $600 million under the Supervisory Capital Assessment Program (SCAP) by Nov. 9, 2009, through a combination of growth in retained earnings and other capital market alternatives. This requirement equals 0.25% of the company's risk-weighted assets as of Mar. 31, 2009. PNC has no plans to convert preferred shares issued under the U.S. Treasury Department's Capital Purchase Program. The SCAP was conducted by various federal banking supervisory agencies with oversight by the Board of Governors of the Federal Reserve System.

"PNC plans to grow retained earnings through our demonstrated ability to deliver net income and to access the capital markets. This will enable us to achieve the capital buffer required by regulators in the event of further economic weakening," said James E. Rohr, chairman and chief executive officer. "Our business model produced a strong start to 2009 with first-quarter net income of $530 million while further strengthening our capital and liquidity positions. I am pleased with our outlook for delivering long-term shareholder value as we continue to make credit available to qualified borrowers and support the efforts of the federal

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