Published May 8, 2009

US BANK STRESS TESTS
Regulators may force shotgun marriages

Banks may turn to mergers, asset sales to raise capital, plug gaps shown by tests

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(NEW YORK) US banking regulators may be tempted to force marriages and asset sales among banks to fill multi-billion dollar capital holes exposed by their stress tests.
In the clear: Goldman Sachs, JPMorgan Chase, American Express, Bank of New York Mellon, Capital One Financial, MetLife and BB&T have passed the test without needing to raise new capital, a Bloomberg report said

But a rapid redrawing of the banking landscape like the one last year is not likely, banking industry watchers say, even though the capital shortfalls at 19 big banks are much larger than analysts had expected.

Citigroup analyst Keith Horowitz wrote that banks, other than his own, may need to raise US$75 billion after the tests.

The results were due to be revealed yesterday in New York and about 10 of the banks may need new capital, according to media leaks.

Seeking stronger partners could be tempting to the weaker banks, but the healthier banks would likely want to repay money they got under the Treasury Department's US$700 billion Troubled Asset Relief Program (TARP) before they contemplate acquisitions. And regulators may not have the needed leverage to force these banks to buy their needy rivals, the industry watchers said.

Still as some banks find it hard to raise money, and with mergers often offering significant cost savings, regulators may try to forge a handful of deals, they said.

Some companies may try to sell assets to raise capital, but regulators are unlikely to give weaker banks six months to raise capital, unless they have assets they can plausibly sell in that time, said Seamus McMahon, chief executive of bank consulting firm McMahon Advisory LLC.

'If what you are saying is that you are waiting for market conditions to improve and you have no plausible plans in place by June, I don't think they will hesitate to force some of these banks together,' Mr McMahon said.

The list of likely acquirers could include banks such as US Bancorp, JPMorgan Chase & Co and Morgan Stanley, Mr McMahon said.

Targets could include banks such as SunTrust Banks Inc, Regions Financial Corp, KeyCorp and Fifth Third Bancorp, he added.

Citigroup Inc, which a source said needs US$5 billion, could be an acquirer as well despite all its troubles, as takeovers could be a way for the bank to get much-needed deposits, Mr McMahon said.

In urging any mergers, though, regulators will want to be careful that they do not create a new problem instead of solving one.

'You don't want to put two stones together and see if they float,' said Jonathan Weld, a banking lawyer at Shearman & Sterling.

'You would only want to put together a strong organisation and a weaker one if you thought that you could restructure it and emerge with a strong single entity.'

The regulators will be dealing with a situation much changed from last fall, when the US financial system was at a risk of collapse and the government bailout money was seen by many as desirable.

Now, healthy banks are eager to give back taxpayer funds and, despite a recession, the end of the financial world doesn't appear to be at hand.

'The reality is they too want to get rid of their TARP money,' said Marshall Sonenshine, chairman of the boutique investment bank bearing his name, referring to healthier institutions. 'So they are not going to buy anything that slows down that process.'

Regulators may have also lost some of their leeway after allegations they forced Bank of America to complete its acquisition of Merrill Lynch.

'Already you have BofA feeling more than a little bit burnt by having been pushed so hard to take over Merrill Lynch,' Mr Sonenshine said. 'You are likely to see more banks fail at the bottom of the food chain.'

Regulators may not want to create another giant through a merger, but they could urge one of the stronger banks to acquire a weak and smaller rival.

'If as a result of the stress test they realise there are two categories of banks - banks with excess capital that are in great shape and banks that are deficient, then such marriages may make a lot of sense from a regulatory standpoint,' said Joseph Vitale, a bank regulatory partner at law firm Schulte Roth & Zabel. -- Reuters