Matthew Goldstein

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Bank Investors Get that Sinking Feeling

June 2, 2009

Once again, bank investors are getting a reminder that share dilution is an issue they’ll have to live with for quite some time.

Shares of most financial institutions were falling Tuesday after federal regulators issued a new edict that requires banks to raise capital by selling shares before they can begin repaying any of the government bailout money they’ve received. The new mandate applies even to the nine banks that last month passed the government’s so-called “stress test,” and were believed not to need to any more capital. It really makes you wonder what passing the stress test was all about.

Two of the hardest hit bank stocks are JPMorgnChase and American Express, which quickly responded to the new regulatory edict by announcing plans to collectively raise $5.5 billion from selling new shares.  Predictably, the share offerings were priced at a discount to Monday’s closing prices for both stocks, meaning instant dilution for existing stockholders. 

And investors should expect more dilution in the weeks and months ahead as other banks sell discounted shares to raise capital to either get out from under the Treasury Department’s Troubled Asset Relief Program, or simply make up for new holes that emerge in their balance sheets. Indeed, despite all the talk these days about the recession coming to an end and green shoots of economic revival, the signs of new trouble for the banks still abound. Think commercial real estate exposure, for starters.

Just today, Moody’s Investors Service reiterated its negative view for the US banking system, saying that many banks will be unprofitable this year. Moody’s says continuing losses on ailing assets and bad loans will put “stress on capital levels.” And that means additional stock sales to fill in some of those new holes.

It’s looking more and more like the bank rally of the past few months is running out of steam.

One comment so far

Nice piece. As you allude to, the stress tests were simply a way to shore up the confidence of investors. After all the “worst-case” scenario seems more like the “plausible” scenario: unemployment just above 10%.

- Posted by ac