Banks race to raise billions in new capital

Published: May 12, 2009

US banks are scrambling to raise billions of dollars in equity, in order to pay back funds they have borrowed from the US government.

Bank of New York Mellon, US Bancorp, Capital One, KeyCorp, Principal Financial Group and BB&T all announced plans to raise more than US$8bn in the coming weeks.

Last week, Morgan Stanley and Wells Fargo raised a total of US$17bn in new equity. Goldman Sachs raised US$5bn in equity in April, and says that it plans to raise more, as does JPMorgan and American Express.

Equity investors have been buoyed by the results of the Federal Reserve and US Treasury’s stress tests, published last week, which suggested that, of the 19 banks tested, 10 of them needed to raise US$75bn in new capital. Others, such as JPMorgan and Goldman Sachs, were given the all-clear by the Treasury and the Fed.

Jon Peace, equity analyst at Nomura in London, says: “There’s been a powerful rally in bank stocks over the last month, in both the US and Europe. Before March, investors were only focusing on negative news. Now, they’re only focusing on positive news.”

Investment banks have enjoyed a very good quarter, thanks to the declining interest rate environment. BNP Paribas’ fixed income revenues more than trebled to US$2.9bn, Credit Suisse’s fixed income business went from a loss in the fourth quarter to a record US$3.5bn in the first quarter, and Deutsche Bank’s debt revenues also tripled.

But the first quarter results are unlikely to be sustainable. HSBC’s CEO Michael Geoghegan says: "The reality is it's a unique period of time with interest rates having come down so significantly and that will work through the system.”

Given that, banks have an incentive to raise capital now, while investor sentiment is so positive. Peace of Nomura says: “There’s only a finite amount of capital there for new issues, so it pays to be first.”

Some banks may find it difficult to meet the Federal Reserve’s requirements for new capital by equity issues alone. Bank of America, which the Fed required to raise US$35bn in new capital, has not yet issued equity, but did raise US$7.3bn through the sale of a 5% stake in China Construction Bank this week.

In Europe, banks have so far raised less equity on the markets, and are instead looking to governments to provide funds. Erste Bank, for example, raised €2.7bn in April, of which €2.1bn was from the Austrian state, and the rest from private investors.

However, there have been some private issues, notably HSBC’s £12.5bn rights issue in March. Other financial institutions say they play to raise capital through rights issues, including Portugal’s BCP, the private equity firm 3i, and SEB.

European companies have raised a record €56bn in rights issues this quarter, which has been a bonanza for equity capital markets teams at investment banks.

JPMorgan leads the EMEA ECM league table in the first quarter, raising US$3.2bn in 16 deals. UBS raised US$2.7bn with 12 deals; while Deutsche Bank raised US$2.7bn in six deals.