Geithner Left Waiting for TARP Payback as Regions, Zions Fall
Regions Financial Corp. (RF) and Zions Bancorporation (ZION) are among the biggest U.S. regional lenders that may struggle to repay taxpayer bailouts this year after bank stocks slumped, analysts said.
The two companies, along with Synovus Financial Corp. (SNV) and Popular Inc. (BPOP), received rescues totaling $6.8 billion from the U.S. Treasury Department’s Troubled Asset Relief Program. That amounts to 74 percent of their combined market value of $9.17 billion, down from $18.5 billion at the end of last year.
Regulators may require the banks to sell shares and raise capital to replace government cash, which could dilute stakes held by current investors, according to analysts including Brett Scheiner at FBR Capital Markets Corp. in New York. Taxpayer money held by the four firms accounts for more than a third of the Treasury’s remaining TARP investments in U.S. banks. Congress approved the rescue program three years ago today.
“It’s not a good time to raise debt or equity if necessary to repay it,” Scheiner said in a phone interview. “Whatever negative brush the banks that still have TARP are painted with, it pales in comparison to the permanent damage that would be done from a deeply dilutive capital raise.”
Bank stocks have dropped this year amid investor concern that profits will be squeezed as U.S. economic growth stagnates, new federal regulations take effect and the European sovereign- debt crisis goes unresolved. While the 200-company Russell 1000 Financial Services Index has dropped 23 percent this year and the KBW Bank Index (BKX) of 24 lenders has tumbled 32 percent, the four TARP banks have slumped even more.
The declines include 59 percent at Columbus, Georgia-based Synovus; 52 percent at both Regions, based in Birmingham, Alabama, and San Juan, Puerto Rico-based Popular; and 42 percent for Zions, based in Salt Lake City.
Treasury Secretary Timothy F. Geithner may have to wait to get taxpayers’ money back if bank stocks continue to slide and the economy fails to expand, said Kevin Fitzsimmons, an analyst with Sandler O’Neill & Partners LP.
“Not having a recovery just prolongs this process of working through your issues of getting back to the new normal, which unfortunately isn’t all that favorable for banks right now,” Fitzsimmons said in a phone interview. “Until you see that sentiment change, it just pushes off the likelihood of one of these companies coming to market for a raise unless they were forced to.”
The stock drops have increased the size of would-be TARP repayments relative to market value, a factor in determining how many shares the banks must sell to raise capital. Synovus owes $968 million, more than its current market value of $846.3 million and Regions took $3.5 billion, equal to 83 percent. Zions owes $1.4 billion, or 54 percent of its value, and Popular’s $935 million equals 61 percent.
Turn a Profit
While the biggest banks have exited TARP, helping the Treasury to turn a profit on the program, the remaining lenders likely will find it more difficult to raise money needed to repay the bailouts, said Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette.
Banks still holding bailouts had a ratio of non-performing assets to total assets of 4.67 percent as of June 30, compared with 2.58 percent for firms that repaid taxpayers, according to a survey by KBW Inc. (KBW) Banks that exited the program had average return-on-equity, a measure of profitability, of 8.03 percent, almost double the average of 4.15 percent for TARP banks, according to KBW.
Regions and Zions likely won’t repay TARP this year as the stocks are too low, said Thomas Brown, chief executive officer of Second Curve Capital LLC.
“You want to be able to do it in the least dilutive manner to shareholders as possible,” he said.
Zions Chief Financial Officer Doyle Arnold said in August that he hoped the firm could return its $1.4 billion bailout by the end of 2011 or the first quarter of next year.
The bank, with operations in 10 states including California and Texas, may have to raise $600 million to exit TARP, which is more than the company or its investors had anticipated before the stock fell, said Todd Hagerman, an analyst with Sterne Agee & Leach Inc. and a former Federal Reserve bank supervisor. That’s about 23 percent of Zions’s current market value.
‘Bite the Bullet’
“There’s question marks as to whether or not they would bite the bullet today and raise just simply to exit TARP in a very difficult capital-markets environment,” Hagerman said. “Any potential capital raise that they may have to do or are asked to do would be more dilutive today than I’m sure they would have originally anticipated.”
Hagerman cut his rating on Zions last month to “underperform” from “neutral.”
James Abbott, a Zions spokesman, declined to comment.
Synovus, which posted losses for 12 consecutive quarters, won’t repay TARP until it returns to profitability, Greg Hudgison, a bank spokesman, said in an e-mailed statement.
Regulators could order Synovus to raise capital valued at up to 30 percent of its TARP debt, or $290.4 million, to exit the program, according to Second Curve’s Brown. That’s about 34 percent of its current market value. Brown, whose firm owned 6.6 million Synovus shares at mid-year, said he expects the lender to be acquired before it repays the U.S.
Regulators also could force Regions to raise as much as $1.05 billion of capital, about a quarter of the bank’s market value, if the company opts to repay taxpayers, Brown said. Regions, led by CEO Grayson Hall, 54, has said it’s considering “strategic alternatives” for its Morgan Keegan brokerage, language that typically means a sale is possible.
‘Patient and Prudent’
Regions, the 12th-biggest U.S. bank by assets, posted losses totaling $7.17 billion from 2008 through 2010 as real- estate markets deteriorated. The firm’s ratio of non-performing loans was 5.87 percent at mid-year, according to KBW data.
“Our position on TARP repayment remains unchanged,” Tim Deighton, a Regions spokesman, said in an e-mailed statement. “Our preference continues to be to repay in as shareholder- friendly a manner as possible, remaining both patient and prudent in that regard.”
Popular, the biggest bank in Puerto Rico, is unlikely to begin discussing a TARP repayment with regulators until the second half of 2012, said FBR’s Scheiner, who has an “outperform” rating on the stock. The lender can exit TARP without selling more shares, he said.
“Popular has no specific date at this moment to repay TARP, but it is committed to exiting the TARP program as soon as possible and has made significant strides toward that end,” Teruca Rullan, a spokeswoman, said in an e-mailed statement.
Popular, led by CEO Richard Carrion, 58, said its ratio of non-performing loans of 5.91 percent was due to the weak Puerto Rican economy. The bank said last week that it sold a portfolio of distressed loans to a group of investors including Goldman Sachs Group Inc. Popular said it will own 25 percent of the new entity that controls the loans. Carrion also is a director of the Federal Reserve Board of New York.
Under TARP, the Treasury bought preferred stock from banks, requiring them to pay 5 percent dividends. The rate increases to 9 percent after five years and there is no pre-set deadline for repayment of principal, according to Matthew Anderson, a Treasury spokesman.
Some of the biggest U.S. lenders, including Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs, have repaid TARP. The program is expected to generate about $20 billion in profit for taxpayers, Treasury has said.