And the Banks that Need to Raise Capital Are...

By: Reggie Middleton | Tue, May 5, 2009
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I am now releasing the additional calculated capital requirements for several banks, with the full set of calculations available for download for free registered users. I am releasing my proprietary work to demonstrate to those who do not currently subscribe to BoomBustBlog the depth and breadth of this site's capabilities.

The Methodology Used

As stated in my original release of the Sun Trust Stress Test Analysis, I don't necessarily agree with the methodology and assumptions of the government's version of the stress test. For one, they don't risk weight earnings, only assets. Some of the investment banking operations take significant risks to generate earnings (see "Goldman Sachs Banking Secrets Mr. Geithner May Not Share With You!), and these actions pose systemic risk. In addition, the bar is too low to be considered truly stressful (eg. 8.4% average unemployment as a base case in an 8.5% unemployment environment, trending upwards). I have rectified the problem of floating government targets and expectations by creating a scenario analysis that covers multiple assumptions, thus the readers can decide for themselves which set of assumptions to use in order to arrive at what they feel would be the government's (or the most realistic) conclusion.

The following is a summary of my simulated government stress tests based upon the white paper released in the latter part of April 2009. See The Supervisory Capital Assessment Program: Design and Implementation 2009-04-30 02:16:44 286.90 Kb and Bank of Finland Recessionary Stress Testing Methodology 2009-04-30 02:18:39 306.64 Kb for methodology. For my personal accounts, I am assuming a 4% bar for Tangible Common Equity and a 6% bar for Tier One Capital. The actual bars have not been released publicly, to my knowledge. It has been stated in the media and dated government documents that the base case government estimates for unemployment was 8.4%. As previously mentioned, we believe that to be unrealistic (given that the latest government figures show 8.5% unemployment and trending upwards), hence we have used the more stringent RGE Monitor macro assumptions for the base case scenario and have reserved what we perceive as the government's stated parameters as the optimistic scenario.

Please be aware that these are illustrative analyses only, and we are not privy to the same access and information that may have went into the government's analysis of these companies. In addition, the government may have wavered from the stated implementation in the whitepaper released above. All in all, I believe this to be a fairly accurate representation of what one could expect from the government in the upcoming days.

The Scenario Analysis Summary for PNC Bank

Capital to be Raised

Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee PNC being in need of roughly $3.25 billion of additional capital causing approximately 18% in dilution among existing equity investors as of the closing price of the 1st of this month.

2010 End base case - rge monitor Adverse case Optimistic case
Risk weighted Assets 260,878 257,111 266,758
Tier 1 risk-based capital 27,948 27,125 28,802
Tangible Assets 285,435 281,138 292,144
Tangible Equity 8,299 7,476 9,153
Tier One Capital 10.7% 10.6% 10.8%
TEC 2.91% 2.66% 3.13%
PNC Share price 40.45  
 
Base Case
Scenario
Min Tangible
Equity
Capital Ratio
Capital
to be
raised
($ mn)
TEC $ mn
(post add
capital )
Tangible
Assets
$ mn
(post add
cap)
No of
shares
(mn)
Dilution
Impact
2010 estimates 2.9% 0 8,299 285,435 0.0 0.0%
  3.0% 272 8,571 285,708 6.7 1.5%
  3.5% 1,753 10,052 287,188 43.3 9.7%
  4.0% 3,249 11,547 288,684 80.3 18.0%
  4.5% 4,760 13,059 290,195 117.7 26.4%
  5.0% 6,287 14,586 291,723 155.4 34.9%
  5.5% 7,831 16,130 293,266 193.6 43.5%
  6.0% 9,391 17,690 294,826 232.2 52.2%
  6.5% 10,967 19,266 296,403 271.1 60.9%
  7.0% 12,561 20,860 297,996 310.5 69.8%

Download the full analysis (as a registered user) here: PNC Simulated Government Stress Test 2009-05-05 02:00:10 1.12 Mb


The Scenario Analysis Summary for Morgan Stanley

Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee Morgan Stanley not being in need of additional capital as of the closing price of the first of this month.

2010 End Base case Base Case Adverse case Optimistic case
Risk weighted Assets 280,233 280,233 270,716 292,711
Tier 1 risk-based capital 40,374 40,374 37,110 43,846
Tangible Assets 659,107 659,107 636,618 688,597
Tangible Equity 28,965 28,965 25,701 32,437
Tier One Capital 14.4% 14.4% 13.7% 15.0%
TEC 4.39% 4.39% 4.04% 4.71%
MS Share price 23.07  
 
Base Case
Scenario
Min
Tangible
Equity
Capital
Ratio
Capital
to be
raised
($ mn)
TEC $ mn
(post add
capital)
Tangible
Assets
$ mn
(post add
cap)
No of
shares
(mn)
Dilution
Impact
2010 estimates 4.4% 0 28,965 659,107 0.0 0.0%
  4.5% 728 29,693 659,835 31.5 2.9%
  5.0% 4,201 33,165 663,308 182.1 16.8%
  5.5% 7,710 36,675 666,817 334.2 30.9%
  6.0% 11,257 40,222 670,364 488.0 45.1%
  6.5% 14,842 43,807 673,949 643.3 59.5%
  7.0% 18,465 47,430 677,572 800.4 74.0%

Download the full analysis (as a registered user) here: MS Simulated Government Stress Test 2009-05-05 02:17:35 2.49 Mb


The Scenario Analysis Summary for Sun Trust Bank

Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee Sun Trust being in need of roughly $1.5 billion of additional capital causing approximately 31.7% in dilution among existing equity investors, as of the closing price of the first of this month.

2010 End Base Case Adverse case Optimistic case
Risk weighted Assets 152,937 150,791 155,063
Tier 1 risk-based capital 13,653 12,358 14,959
Tangible Assets 165,245 162,825 167,642
Tangible Equity 5,121 3,826 6,427
Tier One Capital 8.9% 8.2% 9.6%
TEC 3.10% 2.35% 3.83%
Sun Trust Share price 13.71  
 
Base Case
Scenario
Min
Tangible
Equity
Capital
Ratio
Capital
to be
raised
($ mn)
TEC $ mn
(post add
capital)
Tangible
Assets
$ mn
(post add
cap)
No of
shares
(mn)
Dilution
Impact
2010 estimates 3.1% 0 5,121 165,245 0.0 0.0%
  3.5% 687 5,808 165,931 50.1 14.0%
  4.0% 1,551 6,672 166,796 113.1 31.7%
  4.5% 2,424 7,545 167,669 176.8 49.6%
  5.0% 3,307 8,428 168,551 241.2 67.6%
  5.5% 4,198 9,319 169,443 306.2 85.9%
  6.0% 5,100 10,221 170,345 372.0 104.3%
  6.5% 6,011 11,132 171,255 438.4 122.9%
  7.0% 6,931 12,052 172,176 505.6 141.7%

I have made the full 36 page report available for all to download here: Sun Trust Banks Simulated Government Stress Test 2009-05-04 13:38:04 1019.01 Kb.

I will follow up with Stress Tests for Goldman Sachs and American Express tomorrow. Stay tuned...

For those who do not know or follow me, I have a strong track record in calling this credit crisis:

  1. The Commercial Real Estate Implosion: I called it in 2007 - "GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months".
  2. The Investment Bank Implosions: Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]) - and - Lehman Brothers investment banking/CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008])
  3. The Mortgage Banking Implosion: I called it in 2004, publicly on the blog in 2007 - Countrywide and Washington Mutual (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide with its peer)
  4. The Regional Bank Implosion: Spring of 2008 - nearly all of the failed or failing regional banks of significant size (As I see it, these 32 banks and thrifts are in deep doo-doo!)
  5. The Monoline Implosion: 2007-2008 - MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton) and Ambac (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap and Follow up to the Ambac Analysis), among others including the residential homebuilders and their abuse of off balance sheet JVs - well in advance.

I suggest everybody read up on how we got here. I started taking defensive action in 2004, and implemented my offensive actions 2007 - right around the time this blog was started. Read my blog by blow analysis...

Recommended Reading - The Asset Securitization Crisis:

  1. Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
  2. Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
  3. Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  5. Municipal bond market and the securitization crisis - part I
  6. Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
  7. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  8. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  9. More on the banking backdrop, we've never had so many loans!
  10. As I see it, these 32 banks and thrifts are in deep doo-doo!
  11. A little more on HELOCs, 2nd lien loans and rose colored glasses
  12. Will Countywide cause the next shoe to drop?
  13. Capital, Leverage and Loss in the Banking System
  14. Doo-Doo bank drill down, part 1 - Wells Fargo
  15. Doo-Doo Bank 32 drill down: Part 2 - Popular
  16. Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
  17. The Anatomy of a Sick Bank!
  18. Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
  19. GE: The Uber Bank???
  20. Sun Trust Forensic Analysis
  21. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
  22. Goldman Sachs Forensic Analysis
  23. American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
  24. Part one of three of my opinion of HSBC and the macro factors affecting it
  25. The Big Bank Bust
  26. Continued Deterioration in Global Lending, Government Intervention in Free Markets
  27. The Butterfly is released!
  28. Global Recession - an economic reality
  29. The Banking Backdrop for 2009
  30. Reggie Middleton on the Irish Macro Outlook

Recommended Global Macro Reading from Guest Contributors:

  1. Debt - Thoughts On A Global Problem (Part 1),
  2. Banking out of Control (Part 2)
  3. Global Debt Stats (Part 3)

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Reggie Middleton

Author: Reggie Middleton

Reggie Middleton
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Reggie Middleton

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

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