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Small bank share offers may find fewer takers
May 27, 2009 / 10:17 PM / 8 years ago

Small bank share offers may find fewer takers

NEW YORK (Reuters) - Raising billions of dollars may have proved easier than expected for big U.S. banks seeking to shore up their balance sheets, but smaller institutions may find filling holes in their capital structure an uphill battle.

Regional banks and other smaller institutions that did not undergo the “stress tests” that the 19 largest U.S. banks recently faced may have fewer options to raise money.

“The people that run money in this world have had their fill of bank equity at this point,” said Michael Cohn, chief investment strategist at Atlantis Asset Management in New York.

“There’s more than enough Wells Fargo, Citi and Bank of America to fill everybody’s coffers -- so why would I take a risk on some small bank when I could own Wells Fargo.”

Smaller banks may have a far greater need for capital relative to their size and may need to tap equity markets to cover losses on everything from home mortgage loans to commercial property lending and credit cards.

Of the 418 banks with assets of at least $1 billion, roughly 90 percent will need to raise money to withstand a deeper recession, SNL Financial estimated in a report issued earlier this month.

This estimated shortfall, about $75 billion, is in line with the combined $74.6 billion capital requirement that regulators set for 10 of the 19 largest banks that underwent stress tests to gauge their ability to cope with a worsening recession.

SNL based its analysis on the loan-loss scenarios used in the government stress tests.


Smaller banks that are unsuccessful in raising capital may risk failure, since they lack the U.S. government guarantee the biggest banks enjoy.

“I think the pace (of bank failures) is going to quicken; I think they will accelerate and I think we’re going to go over a 100,” said Lawrence White, an economics professor at New York University’s Stern School of Business.

For smaller banks to raise capital successfully, they must convince investors that they are healthy enough to avoid a seizure by bank regulators. The Federal Deposit Insurance Corp has already taken over some 36 banks so far this year. That compares with 25 bank failures in 2008 and only three in 2007.

“Some banks will be able to convince investors of that, others won‘t, and they will eventually get taken over by the FDIC,” White said.

Still, others are more optimistic and believe funding is readily available for these banks now.

“The world has had a massive change,” Rochdale Securities analyst Richard Bove said. “Funding is now available.”

Morgan Stanley’s Ken Zerbe agreed. “Improving capital markets make it more likely banks can access private funds to bolster their capital positions,” he said.

Indeed there are clear signals of a return by private equity firms into the banking industry, with recent deals like the takeover of Florida-based BankUnited by firms including Wilbur Ross’s WL Ross & Co, Carlyle Group CYL.UL, Blackstone Group (BX.N) and Centerbridge Partners.

“Private equity funding is an alternative for these banks,” Atlantis Asset’s Cohn said, but he added that this usually takes a tremendous amount of time and due diligence when compared with a quick follow-on offering, which can be done overnight.


Other options would include converting preferred shares to common equity, calling for tenders of trust preferred securities, lowering dividends or shrinking balance sheets.

Regional banks such as Chicago-based PrivateBancorp Inc PVTB.O, Marshall & Ilsley Corp MI.N, Las Vegas-based Western Alliance Bancorp (WAL.N) and Huntington Bancshares Inc (HBAN.O) have already announced plans to raise capital, mainly through the sale of common stock.

Milwaukee-based Marshall & Ilsley, which has struggled in recent quarters with rising loan losses, plans to sell up to $350 million of common stock, and Columbus, Ohio-based Huntington plans to raise $675 million of regulatory common equity. But these amounts are significantly less than what analysts expect the two companies will need.

Huntington and Marshall & Ilsley each need to raise more than $3 billion, while Zions Bancorp (ZION.O) would need about $2.97 billion, according to SNL Financial estimates.

Clark Hinckley, head of investor relations at Zions, said the Salt Lake City-based bank had no plans to raise capital as it would not need to under a stress test using the government’s methodology.

A Huntington spokeswoman said the bank’s recent efforts could boost capital levels but declined to comment on the SNL report. Marshall & Ilsley did not immediately return calls seeking comment.

Banks with capital needs may find their capital-raising options start to become even more limited going forward as investor appetite for secondary offerings fades.

Smaller banks may have fewer private preferred shares to convert into common equity, analysts say, weakening one of the major devices the larger banks resorted to in raising funds.

Even common equity raises may prove unsuccessful, experts say, as the market for bank equity has been nearly wiped out because of the flood of offerings by the big banks.

Smaller banks may soon find that merging with a stronger institution could be the only lasting solution to their problems, experts said.

“I would not buy a regional bank before they raise the required capital. I wouldn’t touch any of them with a 10-foot pole before they raise capital,” Cohn said.

Editing by Steve Orlofsky

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