Banks' Reactions to Stress Tests

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 government to restore confidence in the U.S. banking system."

Capital One (COF)

Capital One Financial Corp. today announced that its banking regulators have concluded that Capital One does not need to raise additional capital, nor does the company need to convert any of its existing capital to common equity, under the "more adverse" scenario of the Supervisory Capital Assessment Program (SCAP) "stress test."

"At Capital One, we regularly subject our capital to a variety of stress scenarios as part of our approach to disciplined balance sheet management," said Richard D. Fairbank, Capital One's chairman and chief executive officer. "We believe our balance sheet is a source of strength for Capital One and positions us well to continue to serve the banking and borrowing needs of our consumer, small business, and commercial customers. The results of the banking regulators' stress test of Capital One confirm the strength and resilience of our capital. While we remain cautious given ongoing economic and industry challenges, we are confident that our balance sheet strength provides us with the stability to weather the recession and the flexibility to generate value over the cycle."

Fifth Third (FITB)

"The supervisory stress test confirmed that Fifth Third does not require additional overall capital, either currently or under more adverse conditions," said Kevin Kabat, president, chairman and CEO of Fifth Third Bancorp. "We have outlined and implemented a number of steps over the past year to strengthen our common equity position to prepare for potential economic deterioration. We expect to meet this new commitment to further reinforce our capital composition within six months through additional private market actions. We do not expect to further utilize government capital programs.

The requirement to increase common equity arises as a result of two factors. First, banking regulators have established a new Tier 1 common equity standard of 4%, which we currently exceed with a substantial cushion. Second, that ratio is required to be maintained under assumed economic conditions much more negative than currently being experienced or anticipated. There are some notable signs that important trends in the economy may be in the process of stabilizing.

Or capital levels are substantially above regulatory well-capitalized minimums as well as the new Tier 1 common equity standard. Pro forma for the effect of our pending processing joint venture transaction, our first-quarter Tier 1 capital ratio would have been 11.8% and our Tier 1 common equity ratio would have been 5.5%.

Fifth Third's strong levels of pre-provision profitability and reserves for loan losses provide significant further resources to absorb even the high and conservative level of loan losses assumed under the SCAP assessment. We don't expect loan loss rates to approach those levels. Our recent results and current expectations for the second quarter are significantly better than those assumed for those periods under the more adverse scenario. These near-term results and expectations provide a good starting point for the future level of our capital in later periods. We are confident that our capital levels, including Tier 1 common equity, will remain above levels required by regulatory authorities and our own targets. And creating an additional common equity buffer through further actions will put us in a better position to more quickly redeem the U.S. Treasury's existing preferred stock investment in Fifth Third, subject to regulatory approval."


GMAC Financial Services today confirmed capital requirements for the company resulting from the Federal Reserve's Supervisory Capital Assessment Program (SCAP). In connection with this program, GMAC has committed that no later than Nov. 9, 2009, the company will have increased the common shareholder equity component of Tier 1 capital by $11.5 billion, of which $9.1 billion must be new Tier 1 capital.

Methods to increase capital could include issuance of new common equity or issuance of mandatory convertible preferred shares or conversion of exiting equity into a form of Tier 1 common equity. GMAC is required to provide the Federal Reserve Bank of Chicago with a plan to attain the capital requirements by June 8, 2009.

"Insuring the availability of credit to consumers and businesses is a key component in stabilizing the economy and a top priority at GMAC," said GMAC Chief Executive Officer Alvaro G. de Molina. "We support the government's efforts to shore-up the banking system and expect that the additional capital raised will further strengthen GMAC and aid in achieving our strategic objectives."

These capital requirements do not include the additional capital required to finance Chrysler dealers and customers related to GMAC's previously announced agreement with the automaker. In connection with this agreement, the U.S. government has indicated that it intends to support GMAC by providing the capital required to support the financing of Chrysler dealers and customers.

KeyCorp (KEY)

KeyCorp said today that the bank holding company has sufficient overall capital (Tier 1 and Total Capital) to meet the "more adverse than expected" economic scenario that the government created as part of its "stress tests" of the nation's 19 largest financial institutions, but that it needed to enhance the composition of its capital. Key was directed to increase its tangible common equity by $1.8 billion, which will further strengthen Key's already strong tangible common to tangible assets ratio, which was 6.06% at Mar. 31, 2009.

"Key has a range of available alternatives to raise the common equity from nongovernmental sources over the next six months. It is also our objective to be in a position to repay the TARP/Capital Purchase Program as promptly as permitted," said Henry Meyer, KeyCorp chairman and chief executive officer. KeyCorp says it has numerous alternatives, including exchanges of common shares for outstanding preferred and trust preferred shares, issuing common shares, or other alternatives.

KeyCorp currently has $2.5 billion of TARP/Capital Purchase Program Preferred Stock. If Key is unable to raise the required common capital from private, nongovernmental sources over the next six months, it will, to the extent of the shortfall, be able to convert the TARP/Capital Purchase Program Preferred Stock into Capital Assistance Program Mandatorily Convertible Preferred Stock and thereby satisfy the capital requirement.

MetLife (MET)

"We have been informed by the Federal Reserve that we have completed the capital assessment process and that, based on its economic scenarios and methodology, MetLife has adequate capital to sustain a further deterioration in the economy," said C. Robert Henrikson, chairman, president, and chief executive officer of MetLife. "We are very pleased with this result, which we believe reinforces what we have been saying—MetLife is financially strong and well positioned for both the current environment and a potential further economic downturn."

On Apr. 13, MetLife announced that it had elected not to participate in the U.S. Treasury's TARP Capital Purchase Program. In making the announcement, MetLife noted that it had already reinforced its strong financial position, including repositioning its investment portfolio prior to the current recession; completing a successful $2.3 billion common stock offering last October; and successfully remarketing over $1 billion in debt earlier this year.

Bank of New York Mellon (BK)

"We are pleased with our very favorable results. Applying the results of the stress test, we have estimated that our current healthy capital ratios would strengthen significantly even under the adverse conditions modeled in what proved to be a tough test," said Robert P. Kelly, chairman and chief executive officer of The Bank of New York Mellon. "For our clients worldwide, the results confirm that we have the clear ability to meet their needs in a very challenging environment."

Kelly said the results also reinforce the company's ability to repay the government's capital investment as part of the Troubled Asset Relief Program (TARP). "Hopefully, this will permit us to accelerate the repayment process, subject to approval from our regulators, and provide an excellent return for U.S. taxpayers," he said.

State Street Bank (STT)

"We're very pleased to have passed this important supervisory test by a wide margin. Even under the test's 'more adverse' stress assumptions, State Street's capital levels are well in excess of the required ratios established by the supervisory authorities. The Federal Reserve's findings are also consistent with our own long-held views of the quality of our assets," said Ronald E. Logue, chairman and CEO of State Street. "With the stress test completed, we are now in a position to consider repayment of the TARP preferred stock and warrants under the appropriate circumstances."

American Express (AXP)

The assessment, or stress test, confirms the strength of the company's financial position, indicating that American Express:

— had a year-end 2008 Tier One Common Risk-based ratio of 9.7%, one of the highest in the industry. That translates into a capital level approximately $6 billion above the regulatory benchmark of 4.0%.

— had a year-end 2008 Tier One Risk-Based Capital ratio of 9.7%—or 13.0% on a pro forma basis reflecting the issuance of preferred shares in January as part of the Capital Purchase Program (CPP).

— would generate earnings in 2009-10 even under the 'more adverse scenario' used by the regulators.

U.S. Bancorp (USB)

"The Federal Reserve's assessment program was extensive and thorough, and although we do not agree with all of the assumptions used to measure our capital adequacy, we are very satisfied, and not surprised, with the overall results," said Richard K. Davis, chairman, president, and chief executive officer of U.S. Bancorp. "Today's announcement by the Federal Reserve further demonstrates that our disciplined approach to credit and risk management, diversified mix of businesses, emerging revenue momentum, and strong balance sheet have enabled U.S. Bancorp to successfully manage through the current challenging and uncertain environment, while remaining positioned to withstand the pressure of an even more adverse economic scenario."

"With the stress test now behind us, we remain committed to paying back the TARP funds as quickly as possible, and we will continue to work closely with our regulators to establish the appropriate timetable," said Davis.

Financial Services Roundtable

The Financial Services Roundtable supports the Treasury's actions to bring strength and stability to our industry. We are pleased that today's stress test announcement recognized that our financial institutions are well-capitalized.

Today's results do not reflect the current health of the 19 financial institutions, but rather the tests focus on any need for additional capital under a future worst-case scenario. The stress test serves as a road map to increasing future capital, which can be accomplished either independently, or through additional government funding; options for raising that capital can include selling assets, new equity offerings, and converting preferred shares to common. We believe that the stress test results serve to stabilize the public's trust in our industry.

The economic recovery starts with the financial-services industry, and the recovery has begun from a position of relative strength. As we acknowledge the significant milestone announced today, the financial-services industry is poised to emerge stronger and more effective.

American Bankers Assn., Edward L. Yingling, president and CEO

The results of the stress tests should put to rest the harmful speculation we have seen over the past few months. After extensive analysis of what additional capital might be needed to provide an extra cushion against a negative scenario, the regulators have: first, confirmed that all 19 banks are well capitalized; and, second, indicated that, generally, existing total Tier 1 capital levels are adequate to meet even the negative scenario.

Several aspects of this announcement continue to be largely overlooked:

First, while additional tangible common equity (TCE) will be required in some cases, generally the Tier 1 capital levels already meet the stress test total. The regulators are, in effect, changing the existing rules and requiring that a higher TCE percentage be held within the Tier 1. Thus banks are not required to have additional Tier 1 capital; they are required in some cases to change the mix of their capital. While the market, and now the regulators, have apparently decided to focus on TCE, there is, in fact, little empirical evidence to support the theory that the mix of Tier 1 capital needs to be changed.

Second, while some commentators continue to question the assumptions behind the stress tests, the loss ratios included in the tests are, in fact, very severe and very unlikely to be reached.

Third, it appears the regulators were extremely conservative in allowing for increased revenue projections to be included by the banks—revenues that will reduce the need for more TCE.

Fourth, the requirement to increase components of capital beyond well capitalized is an extraordinary action. It is the creation of a buffer on a buffer. In fact, this action, which is pro-cyclical, is contrary to the recommendation last month of the G-20, which stated that capital policy should be counter-cyclical.

Fifth, much of the additional TCE required for some firms will be raised from private sources or by conversion of existing preferred shares held in the private sector. Where necessary, existing government preferred under the CPP program may be converted to the convertible preferred under the CAP program. This new CAP security is not common equity until it is converted, and it may well never need to be converted. However, the convertible preferred is TCE.

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