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View Count: 98 |  Publish Date: March 08, 2013
Fed Sees Goldman, JPMorgan Overvaluing Capital Strength
By Dakin Campbell, Dawn Kopecki & Michael J. Moore - 2013-03-08T05:12:51Z
Goldman Sachs Group Inc. (GS), JPMorganChase & Co. (JPM) and Morgan Stanley (MS) lagged behind peers in a keymeasure of capital strength used by U.S. regulators to stress-test their resiliency in a severe recession.
The three firms submitted more-optimistic estimates oftheir capital strength and ability to avoid losses on tradingand lending than Federal Reserve projections released yesterdayfor the 18 biggest U.S. banks. Of the three, the gap was widestfor Goldman Sachs, which predicted that its Tier 1 common ratiomay fall as low as 8.6 percent in a sharp economic downturn,compared with the central bank’s 5.8 percent estimate.
The disparities -- including a gap of 1.3 percentage pointsfor JPMorgan -- raise the risk that some banks may have been tooaggressive while seeking Fed approval to distribute capital toinvestors through dividends and share repurchases. The companiesmust maintain Tier 1 common ratios of at least 5 percent undertheir capital plans. The Fed is set to release the results ofthose requests next week.
“If you came in with rosier assumptions than the Fed’s ownbaseline, then you’re definitely at risk of failure” in thecapital request, said Christopher Whalen, executive vicepresident at Carrington Investment Services LLC. “The Fed isgoing to push back on those banks.”
Spokesmen for JPMorgan, Goldman Sachs and Morgan Stanley,all based in New York, declined to comment. Disputes Fed
Auto lender Ally Financial Inc. (ALLY) had a capital ratio of 1.5percent, the lowest of the firms tested. Detroit-based Ally,which is majority owned by the U.S., disputed the Fed’s results,calling the analysis “inconsistent with historical experience”and “fundamentally flawed.”
The results are a prelude to the Fed’s capital-plan reviewof the same banks scheduled for release on March 14. Yesterday’sresults don’t forecast next week’s because the first testexcludes management’s plans, a Fed official said yesterday on aconference call with reporters.
Banks have said they were coming into this year’s processmore cautious even as investors of the six biggest U.S. lenderswere anticipating capital payouts that could total $41 billion.
Goldman Sachs Chief Financial Officer Harvey Schwartz toldanalysts in January that the firm works closely with regulatorsto ensure it has a “conservative capital plan.” JPMorganscaled back its $15 billion share buyback program by at least 20percent and hopes to boost the bank’s 30-cent quarterlydividend, Chief Executive Officer Jamie Dimon said this year. Brokerage Venture
Morgan Stanley CFO Ruth Porat said in January that her firmonly requested approval for buying the remaining 35 percent ofits brokerage venture from Citigroup Inc.
Not asking for a lot won’t help lenders if the assumptionsthey use aren’t appropriately cautious, said Richard Bove, abank analyst with Rafferty Capital Markets LLC in New York.
“Even if they were conservative in their request, thecapital plans will be turned down if the assumptions were tooaggressive,” Bove said in a phone interview. “The Fed riskslooking like it caved to pressure” if it doesn’t reject thoseplans, he said.
The banks probably were hurt by their risk of tradinglosses, analysts said. The six biggest firms were projected tolose $97 billion on trading in nine quarters through 2014,compared with $116.5 billion in losses estimated in last year’stest, the central bank said. Goldman Sachs and JPMorgan had themost such risk, with the Fed projecting losses of $24.9 billionand $23.5 billion, respectively. JPMorgan said its tradinglosses would be $17.5 billion. ‘Volatile Business’
“It’s a much more volatile business,” said Jennifer Thompson, an analyst at Portales Partners LLC. “In a stressedenvironment you will have potentially massive losses. The offsetshould be that they are getting better returns from thosebusinesses. Theoretically, it should all equal out.”
Citigroup, the only U.S. bank among the six biggest to haveits capital plan rejected last year, saw its Tier 1 common ratiofall to 8.3 percent under the central bank’s projections. Thecompany sought permission to repurchase $1.2 billion of itsshares without seeking a dividend increase, Citigroup said in apresentation after the Fed posted its report.
The planned buyback would “offset estimated dilutioncreated by annual incentive compensation grants,” the New York-based lender said in the presentation.
Since the 2008-2009 financial crisis, U.S. regulators havetried to minimize the odds of another taxpayer rescue,compelling banks to retain some earnings and reinforce theirbuffers against possible losses. The Fed said the aggregate Tier1 common capital ratio for the 18 banks would fall from anactual 11.1 percent in the third quarter of 2012 to 7.7 percentin the fourth quarter of 2014. Global Guidelines
The Tier 1 common ratio measures a bank’s core equity, madeup of common shares and retained earnings, divided by its totalassets adjusted for risk using global banking guidelines.
JPMorgan, the biggest U.S. bank, projected that its keycapital ratio wouldn’t fall below 7.6 percent, compared with 6.3percent estimated by the central bank. The lender said pretaxlosses through 2014 would total $200 million while the Fed saidthey would be $32.3 billion. JPMorgan also was more optimisticthan the Fed in estimating net revenue, loan losses andprovisions it would need to cover those losses.
Morgan Stanley estimated its Tier 1 common ratio could fallto as low as 6.7 percent, 1 percentage point higher than theFed’s projection. The bank’s estimate for net revenue in thestressed period was $5.1 billion higher than the Fed’s. ‘More Optimistic’
“Managements probably need to be a little bit moreoptimistic, the Fed’s a regulator,” Stifel Financial Corp. (SF) CEORonald Kruszewski told Matt Miller in an interview on BloombergTelevision’s “Fast Forward” program. “That’s not unusual.”
The Fed’s minimum projected ratio for Bank of AmericaCorp. (BAC), which didn’t request buybacks or a dividend increase lastyear, would drop to 6.8 percent in the most adverse scenariowhile Wells Fargo & Co.’s would be 7 percent.
Losses for the 18 firms, which represent more than 70percent of the assets in the U.S. banking system, would total$462 billion over nine quarters, according to the Fed.
Under the Fed’s worst-case scenario -- where U.S. grossdomestic product doesn’t grow or contracts for six straightquarters, unemployment peaks at 12.1 percent and real disposableincome falls for five consecutive periods -- the 18 companieswould lose $316.6 billion on soured loans, led by Bank ofAmerica. The Charlotte, North Carolina-based firm would lose$57.5 billion, followed by $54.6 billion for Citigroup and $54billion each for Wells Fargo and JPMorgan. Mortgage Losses
Home loans were the largest source with $60.1 billion inprojected losses on first mortgages and $37.2 billion on juniorliens and home-equity loans. Bank of America would face $24.7billion in losses, as San Francisco-based Wells Fargo wouldincur $23.7 billion, the Fed estimated.
The next-largest source of bad debt was credit cards, whichthe Fed estimated would cost banks $87.1 billion. Citigroup, theworld’s biggest credit-card lender, led loss estimates with$23.3 billion. Capital One Financial Corp. (COF), which gets more thanhalf its revenue from credit cards, would lose $16.4 billion.
“The stress analysis and underlying assumptions areinformed by a number of factors, including our experience in the2008 financial crisis and subsequent recession,” McLean,Virginia-based Capital One said in a presentation on itswebsite.
As a share of a company’s loans, Capital One’s portfolioperformed worst, with losses amounting to 13.2 percent of itsholdings, according to the Fed. That compares with 6.9 percentfor Bank of America and 7.7 percent for JPMorgan.
Dimon, 56, expressed confidence about the outcome of thestress test when he spoke to analysts and investors last week.
“Whatever happens, the company will be fine, as long as wecan freely compete with everybody else in the world,” Dimonsaid Feb. 26 at the company’s investor day. “That, to me, isthe most important thing of all.”
The following shows how the 18 biggest U.S. banks performedunder the Fed’s preliminary stress test results, which didn’ttake into consideration new capital proposals. They are rankedby their lowest projected minimum tier 1 common ratio under theFed’s severely adverse economic scenario:
Ally Financial Inc. 1.5Morgan Stanley 5.7Goldman Sachs Group Inc. 5.8JPMorgan Chase & Co. 6.3Bank of America Corp. 6.8Wells Fargo & Co. 7.0SunTrust Banks Inc. 7.3Capital One Financial Corp. 7.4Regions Financial Corp. 7.5KeyCorp 8.0Citigroup Inc. 8.3U.S. Bancorp 8.3Fifth Third Bancorp 8.6PNC Financial Services Group Inc. 8.7BB&T Corp. 9.4American Express Co. 11.1State Street Corp. 12.8Bank of New York Mellon Corp. 13.2
To contact the reporters on this story:Dakin Campbell in San Francisco at dcampbell27@bloomberg.net;Dawn Kopecki in New York at dkopecki@bloomberg.net;Michael J. Moore in New York at mmoore55@bloomberg.net
To contact the editor responsible for this story:David Scheer at dscheer@bloomberg.net

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 bank   banks   biggest   capital   cent   central bank   common   Corp   estimate   fed   financial   firm   Goldman Sachs Group Inc   Inc   JPM   JPMorgan   loss   losses   Morgan   New York   percent   plan   ratio   Wells Fargo   and Morgan Stanley 
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