Results of bank stress tests will finally be released Thursday, but they've already boosted confidence in financial markets, a key goal of the Obama administration as it tries to revive the banking system.
Bank stocks soared Wednesday as results of the stress tests on the USA's 19 largest banks started leaking out. The results, to be officially released at 5 p.m. ET, will likely say at least 10 banks have to raise capital, with Bank of America bac needing up to $34 billion, Citigroup c up to $55 billion and Wells Fargo wfc, $15 billion, according to a person briefed on the findings, who wasn't permitted to comment publicly on the results ahead of the announcement.
"The numbers look huge, but this process is about resolving uncertainty and reassuring that banks can survive the worst-case scenario," says Maureen O'Hara, finance professor at Cornell University's Johnson Graduate School of Management.
BofA shares soared 17% to $12.69; Citi, 17% to $3.86; and Wells, 16% to $26.84.
Regional banks such as Regions Financial rf, Fifth Third fitb, SunTrust sti, KeyBank key and BB&T bbt likely will need capital, the source said, without providing specific amounts. Meanwhile, the tests found JPMorgan Chase jpm, American Express axp, Bank of New York Mellon bk and Morgan Stanley ms have enough capital to handle losses from a worsening economy, the source said. The office of BofA's chief administrative officer, Steele Alphin, confirmed BofA will need capital under the stress test. The other banks declined to comment.
"Stress tests have been a market confidence builder to date," says Terry Moore, managing director of Accenture's North America banking practice.
The optimism could be fleeting if the market perceives the tests weren't strenuous enough, says Douglas Elliott, a fellow at the Brookings Institution. Much of the bullishness so far stems from hopes it might not be hard for the banks to raise capital. One way to do that is by converting the government's preferred share investments from the bank bailout program into common shares. That would boost the "tangible common equity" ratio, an important gauge against which losses are measured.
Citi made a deal in February in which the government would be able to convert up to $25 billion of its preferred shares into common stock, for a 36% stake. Citi also is raising capital through asset sales. For instance, last week it said it is selling Nikko Cordial, its Japanese securities arm, for $7.9 billion. If BofA converts the government's preferred stock, it could "put the capital issue behind it," analyst Keith Horowitz at Citigroup said in a report.