BofA TARP repayment piles pressure on PNC, Wells

NEW YORK (Reuters) - Bank of America Corp's BAC.N surprise move to repay government bailout funds may pressure rivals to follow suit, but don't expect many big banks in the near term to repay all the funds they've borrowed.

Most big banks that still have to repay the government are either not strong enough to do so or do not want to issue another round of shares and dilute current investors.

Two of the healthiest major banks that still have to repay the government -- Wells Fargo & Co WFC.N and PNC Financial Services Group PNC.N -- may have the ability to repay soon but have said that they do not want to issue more shares and dilute their shareholders.

“Government capital is still relatively inexpensive, so if you can stand being talked about, it doesn’t make sense to be in a hurry to repay,” said Walter Todd, portfolio manager at Greenwood Capital.

PNC and Wells Fargo also have less incentive to repay the government than Bank of America Corp BAC.N. B of A received $45 billion of funds from the Troubled Asset Relief Program, making it one of the few banks to get multiple rounds of bailout money. Those extra rounds gave the U.S. government more say in the bank's day-to-day affairs, including compensation for top employees.

“Bank of America really needed to get that monkey off their backs,” Greenwood’s Todd added.

A PNC spokesman said the bank will repay TARP in a shareholder-friendly manner by the end of 2010, subject to approval from regulators. The spokesman declined to comment on whether the bank is in discussions with regulators about returning the funds.

Wells Fargo is not changing its position on TARP repayment, a spokeswoman said. The bank will work closely with regulators to determine the appropriate time to repay TARP, while maintaining strong capital levels, the spokeswoman wrote in an email earlier this week.

Despite the denials, concern about dilution weighed on both PNC and Wells Fargo, with the former down 6.4 percent, making it the biggest decliner in the KBW Bank index .BKX. Wells Fargo, down 3.5 percent, also lagged the index.


A few key metrics may determine which banks have an appetite to repay TARP funds. One is tangible book value per share, a measure of a bank’s net worth that strips out assets that may end up having no value, such as goodwill.

If a bank’s share price is below its tangible common equity levels, any share issuance will hurt its tangible book value per share, effectively destroying value for common shareholders.

Several investors cited that as a reason for Citigroup C.N, the third-largest U.S. bank, to be reluctant to issue shares now to repay the $27 billion of Citigroup trust preferred securities that the U.S. government owns.

The government also has about a third of Citigroup’s common shares, which it can sell when it cares to.

PNC and Wells Fargo’s shares both trade at more than twice their tangible book value.

Capital levels are another key metric in determining which banks might choose to leave TARP. On this basis, Citigroup looks stronger. For example, it has a tier one common capital ratio of 9.1 percent, compared with 8.5 percent for Bank of America after the share offering. Wells Fargo’s tier one common capital ratio is 5.2 percent, and PNC’s is 5.5 percent.

Profitability is also an issue, because banks that are generating losses could eat into their capital levels in the future, investors said.

Citigroup has not yet generated profits from its main banking operations this year. And some other banks that still have TARP money outstanding, such as SunTrust Banks Inc, STI.N have posted big losses.

A spokesman for SunTrust said, “We have consistently said we have desire and liquidity to repay TARP. That continues to be the case.”

Experts in Washington and New York said other banks are pressing to leave TARP soon, which will likely only intensify with Bank of America receiving permission.

“To have Bank of America beat them to the punch will really put pressure on them to repay as soon as possible,” said Jaime Peters, analyst at Morningstar in Chicago, speaking about Wells Fargo. “Shareholders are going to start getting impatient for them to take action.”

But even with shareholder pressure on management, and management pressure on regulators, there is not likely to be a large group of banks ready to leave now, analysts said.

“We could see a trickle -- there will be others -- but it won’t be a torrent,” said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon.

Additional reporting by Karey Wutkowski; Editing by Steve Orlofsky