Analysts: Wells Fargo and Bank of America Need More Capital

April 14, 2009 No Comments »

capital

Just days after banking stocks rallied, a pair of analysts argued that the top mortgage lenders may need to raise more capital to offset huge expected loan losses.

KBW Inc.’s Frederick Cannon said Wells Fargo may need $50 billion to pay back the federal government and cover an expected $120 billion in “stress” losses, assuming the recession continues through the first quarter of 2010.

He also noted that their $3 billion first quarter earnings estimate is likely attributable to merger accounting, revised accounting standards, and foreclosure moratoriums, and less to do with underlying trends.

The San Francisco-based bank and mortgage lender raised its provision for loan losses by $4.6 billion in the quarter, below Cannon’s estimate of $5.4 billion and FBR analyst Paul Miller’s $6.25 billion figure.

Meanwhile, net charge-offs, where banks essentially write something off as a loss, totaled just $3.3 billion, compared with $6.1 billion in the previous quarter at Wells/Wachovia.  Hmm…

Cannon thinks the numbers are artificially low, thanks in part to consumer tax refunds and foreclosure moratoria, which are simply temporary, and should lead to a “re-acceleration” of charge-offs in the second quarter.

Meanwhile, Wachovia Capital Markets LLC analyst Matthew Burnell said in a note to clients that Bank of America is not as well capitalized as its peers, and will probably have to sell more stock to raise capital.

He said the Charlotte-based bank has large exposures to troubled assets, like $9.9 billion in residential construction and development loans, and $111.5 billion in credit card and other revolving loans.

Bank of America received $45 billion in capital by selling preferred shares to the U.S. government, and raised another $10 billion in October via a stock sale.

Makes you wonder how banks like Citi are hanging around.

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