Increased Government Support for Banks?

The Wall Street Journal was out with an article on Monday stating that over 1,800 publicly traded banks would likely seek access to the Treasury Department’s rescue plan.  While the total dollar figure being attached to the rescue plan is in excess of $700 billion, only $250 billion has been earmarked for bank recapitalizations.  While this is a large sum, it is increasingly looking as if more money will be needed given the sheer number of banks that have not yet received government investments. 

As we can see from the table below (via thestreet.com), nearly $170 billion has already been committed to supporting the institutions that control the majority of our banking system’s deposit base.  However, this leaves only $80 billion in Treasury funds for the support of our country’s remaining 8,000 banks, most of which are private and state chartered.  In other words, it’s going to get messy from here on out as the Bush administration will be forced to go back to Congress for more money, seriously reexamine the United States’ hybrid bank structure and be forced to develop an innovative method for delivering much needed capital to community banks.  These community banks will prove difficult to deliver capital to because they are either too small or unwilling to become public, yet they nonetheless serve a vital part in the American economy and will need government capital in order to ensure the success of the Bush Administration's bank bailout.  A simple division of the $80 billion dollars remaining among the 5,000 private and public banks likely to be working towards a government injection shows that they would on average receive a mere $16 million dollars, which is a surprisingly low figure and a cause for concern. 

Banks Receiving Government Investments
Bank	Ticker	Amount (in billions)
JPMorgan Chase	JPM	25.000
Bank of America*	BAC	25.000
Citigroup	C	25.000
Wells Fargo	WFC	25.000
Goldman Sachs	GS	10.000
Morgan Stanley	MS	10.000
PNC Financial Group	PNC	7.700
US Bancorp	USB	6.600
Capital One	COF	3.550
Regions Financial	RF	3.500
SunTrust	STI	3.500
Fifth Third	FITB	3.400
BB&T	BBT	3.100
Bank of New York Mellon	BK	3.000
KeyCorp	KEY	2.500
Comerica	CMA	2.250
State Street	STT	2.000
Marshall & Illsley	MI	1.700
Northern Trust	NTRS	1.500
Huntington Bancshares	HBAN	1.400
Zions	ZION	1.400
First Horizon	FHN	0.866
City National	CYN	0.395
Valley National	VLY	0.330
United Commercial	UCBH	0.298
Umpqua Holdings	UMPQ	0.214
Washington Federal	WFSL	0.200
First Niagra	FNFG	0.186
Old National	ONB	0.150
First Community	FCBC	0.043
HF Financial	HFFC	0.025
Redding Bank	BOCH	0.017
FFW Corp.	FFWC	0.007
Saigon National	SAGN	0.001
Provident**	PBKS	0.000
TOTAL		169.832
Source: The Financial Services Roundtable, KBW   *Includes Merrill Lynch   **Hasn't decided to participate

 

The government capital injections makes investing in banks difficult as it allows for an added variable that investors must take into account. Nevertheless, as the video below from Bloomberg discusses there are several metrics that can still be used by investors to gauge the risk of their bank investments.  According to the commentator, tangible book value, normalized earnings and “excess” regulatory capital are all important characteristics that investors should be knowledgeable of when investing in banks.  Even if his conclusions are poorly timed, the commentator does a nice job of laying out the framework needed for conducting bank investments. 

As we saw in the forced National City sale, banks that have taken government capital should be viewed as having received a seal of approval from the government and can be considered by investors as safe havens in the financial sector and are more likely  then not trading at once in a generation prices, regardless of the weakness in the economy going forward.   

For Further Review:

Thestreet.com Bank List

WSJ Article