Rising Stocks Provide Capital Window For Banks
By Daniel at 25 September, 2008, 8:04 am
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NEW YORK (Dow Jones)–A window has opened for banks large and small to do what
looked like a tough task only a few weeks ago: Raise common equity in the open
market.
That window may close soon, in part because short sellers might be back next
month and third-quarter earnings reports are looming. These two events are
unlikely to make tapping the market any easier, some observers said.
And those banks that actually need capital the most might still find tapping the
market a hard sale.
Late Tuesday, three very different banks of very different sizes started what
could be a wave of capital raises on the hells of soaring bank stocks since the
government proposed a plan to help the mortgage market and the stop on short
selling.
Goldman Sachs Group Inc. (GS), Capital One Financial Corp. (COF), and First
Niagara Financial Group Inc. (FNFG) announced equity offerings late Tuesday or
earlier Wednesday.
Capital One announced it would raise about $750 million in capital to provide for
souring loans, but also to take advantage of potential asset sales by others.
First Niagara said it would raise $100 million.
Goldman Sachs first announced that it would sell $5 billion of preferred stock to
Berkshire Hathaway Inc. (BRKA,BRKB), the insurance giant run by Warren Buffet. On
Wednesday, the broker-dealer turned bank holding company said it priced a common
stock offering worth an additional $5 billion.
Others are likely waiting in the wings. William F. Hickey, a co-head of
investment banking at Sandler O’Neill & Partners LP, said, “Given the valuations
of even the large cap companies, I think everybody might play in the current
market. We’ll see how long the window is open.”
John Duffy, chairman and chief executive of KBW Inc. (KBW), a specialist advisor
for financial companies, said several banks ranging in size from $2 billion to
$15 billion of assets have approached the firm in recent days to raise billions
in capital. (KBW advised First Niagara, along with Sandler O’Neill. JPMorgan
Chase & Co. (JPM) and Citigroup Inc. (C) advised Capital One.)
Equity has usually been an expensive form of capital, but this market is
different, Duffy said. “The credit market is still closed for any kind of debt or
trust preferred” securities, he said. “Investors in those markets are demanding
equity-type returns, so you might as well issue equity.”
Shares of regional banks have been on a firm footing since July. The government’s
efforts to intervene in the mortgage crisis and the regulatory-induced stop on
short selling sent bank stocks soaring late last week. After a retreat on Monday,
the group of regionals continued to outperform the market Tuesday and Wednesday.
The KBW regional bank index is down less than one percent this year, compared to
an almost 20% drop for both the Dow Jones Industrial Average and the Standard &
Poor’s 500.
Regional and community banks are in better shape than big banks because they are
less entangled in the capital markets slump tied to illiquid mortgage assets.
Hence, many bankers for these smaller institutions thought earlier this year that
they didn’t need to raise capital.
But some took a hit when Fannie Mae (FNM) and Freddie Mac (FRE) were taken over
by the government, eliminating the income from the dividend on preferred stocks
that banks held as investments and causing write-downs in their investment
portfolios. In addition, credit quality could create pain if more consumer and
construction loans go bad. Commercial borrowers have already felt some pain from
the slowing economy.
Other banks might simply want more capital to take market share from their weaker
competitors. “Some people are seeing pretty good loan demand at pretty good
spreads,” KBW’s Duffy said.
First Niagara, for example, has a strong balance sheet and its capital boost “is
clearly opportunistic,” Sandler’s Hickey said. He, and some analysts, believe the
Lockport, N.Y., company will use the money to expand its loan book.
Two weeks ago, Zions Bancorp. (ZION) raised $250 million in common stock also for
opportunistic reasons. Clark B. Hinckley, the bank’s head of investor relations,
said in an interview Wednesday, “There is a surprising amount of good loan demand
out there,” and Zions intends to use its capital to take advantage of it.
Some analysts believe Zions could be among the group of stronger banks that might
raise even more capital to take market share. Hinckley said the bank has no
immediate plans to raise more capital - though it would keep its options open.
Capital One did say it did would invest some of the money it is raising now, but
also wanted to have a larger cushion in case credit quality turned worse. And,
like First Niagara, its balance sheet is considered strong.
Goldman Sachs, on the other hand, likely needed to raise capital to deleverage
its balance sheet now that it has become a bank, one investment banker said.
And how investors will react to the proposals of other banks who go out raising
capital not because they want to, but because they need to, is another question.
One investment banker said: “If there is a perception that, pro-forma for the new
capital raise, the story still is not on a firm footing, then many [investors]
will be reluctant to participate.”
“I was on the phone today with six or seven financial issuer client, and they are
all asking for my judgment” about how the market would react to a capital raise,
the banker said. “And I give very caveated answers.”
“You only want to come to the market when you are sure that the transaction will
be successfully executed,” and a number of clients have reason to remain hesitant
about whether they can do so, the investment banker said.
Size may also matter. While a big, well-known bank issuing stock at the right
price will likely find takers even if it has some issues, smaller banks are not
that lucky despite the short selling ban. “For the small companies, you need a
good story. A small company with a bad story is irrelevant,” another investment
banker said.
Those mulling a placement might want to act while their stocks are hot. Given the
volatility, no investment banker is sure how long the party will last. And some
analysts have become wary of investors’ recent enthusiasm, downgrading the stock
rating of a slew of banks over the last couple of days because those stocks have
become too expensive.
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