NEW YORK Hundreds of U.S. banks are likely to raise capital in the coming months to deal with losses from bad consumer loans, commercial real estate and other assets, and to build war chests to buy failing rivals.
The only question is, when will the window of opportunity slam shut?
U.S. banks have already raised $52.9 billion through equity issuances this year, to fill holes in their balance sheets and appease regulators. Those stock sales accounted for nearly a third of all equity issuance in the country from public companies, according to Thomson Reuters.
Investment bank Sandler O'Neill has already raised capital for about 40 banks this year. It is closely monitoring some 300 banks that it thinks could also need to raise capital, Senior Managing Principal James Dunne said.
"For the next 18 months, capital raising will be a very important component" of Sandler O'Neill's business, Dunne said.
Issuers are likely to include strong banks repaying capital to the government and institutions that want to buy failed banks, Dunne said.
"What investors really want to see now is that the next capital that they put in is not defensive," Dunne said. "That it can be used to take advantage of the massive consolidation, which will be driven primarily through an FDIC function. We are probably 18 months away from healthy deals."
Regulators, who kickstarted capital-raising earlier this year with the so-called stress tests on the biggest banks' ability to withstand a deep recession, are also likely to play an ongoing role in nudging institutions to the markets.
"Bank capital requirements are going up, not down," said Michael Wiseman, a managing partner of Sullivan & Cromwell's financial institutions group. "So for people who can raise capital, if there is a window to do it, there is every incentive for them to try."
The focus of capital raising for now is on equity, with other means such as issuing trust preferred, convertible preferred and other securities likely to come later, the experts said.
Last year, FBR Capital Markets predicted the whole system would need some $1.2 trillion in capital, said analyst Paul Miller. He said some $300 billion might have been raised already through various means, but hundreds of billions of dollars more was to come.
"If the capital window is open, you run through it because you never know when it is going to shut," Miller said.
"The issue is, when does it end? When does the investor stand up and say, 'Wait a minute, you said last time this is the last capital raise,'" Miller said.
Investor interest could wane if consumer credit and commercial real estate end up being as big a problem as many fear, said Mitchell Eitel, a partner in Sullivan and Cromwell's financial institutions and M&A groups.
"There is a sense that right now is a good time to raise capital for banks," Eitel said. "There really is a drumbeat of, 'We want common equity.'"
(Reporting by Paritosh Bansal, editing by Matthew Lewis)