Bank of America needs $34 billion in extra cash, a source familiar with U.S. government stress tests on leading banks told Reuters, unsettling markets and stoking talk of a possible asset sale in China.
Separately on Wednesday the New York Times said Citigroup Inc may have to raise between $5billion and $10 billion in the wake of the U.S. stress tests, a series of health checks which has been keeping a firm grip on financial markets this week.
The news spooked investors, who had hoped the stress tests on 19 big banks would show the industry was in less dire condition than feared. The yen jumped and Treasury futures in Asia rose, a sign risk appetite is dropping.
Shares in Bank of America -- the biggest U.S. bank -- were down 8.5 percent in Frankfurt by 7:48 a.m. EDT. The group declined to comment on its capital needs. Citi shares in Frankfurt were down 4.4 percent.
Bank of America has been at the top of the list of those believed to need more capital, as it faces significant credit losses after a controversial takeover of crisis-struck investment bank Merrill Lynch & Co, which closed on January 1.
But the $34 billion figure more than triples previous estimates of its capital needs and comes after Chief Executive Kenneth Lewis told analysts on April 20 we absolutely don't think we need additional capital.
U.S. Federal Reserve Chairman Ben Bernanke sought to soothe markets about the outcome of the tests, saying many will be able to bolster their balance sheets through private-sector funding without the need for new taxpayer bailouts.
European stock markets were slightly positive after some good news for the battered banking sector from France's biggest bank, BNP Paribas, which posted first-quarter results well ahead of forecasts.
One option for Bank of America would be to sell shares in China Construction Bank, Hong Kong investment bankers said. CCB shares dipped 1.5 percent on Wednesday amid reported short-selling.
It was not clear how much, if any, of the shares Bank of America would sell when a lock-up expires on Thursday. The bank said it wanted to remain a long-term shareholder, but declined to elaborate on its possible capital needs.
It is allowed to sell 13.5 billion shares in CCB, a 6 percent stake worth some $8.3 billion. That would leave it with a 10.6 percent stake, a level CCB has said is reasonable. Selling such stakes is politically sensitive in China.
The possible cash call is certain to increase pressure on Lewis, who was last week ousted by shareholders as chairman. That could lay the groundwork for his eventual departure from the bank where he has worked for 40 years.
Critics believe Lewis overpaid when he bought Merrill for about $29.1 billion in common and preferred stock, agreeing to the takeover after less than 48 hours of negotiations and due diligence. Through Tuesday, BofA shares had fallen 68 percent since the Merrill purchase was announced on September 15.
It is unclear how the bank might raise necessary capital but it might be forced to convert some of the government's preferred shares into common stock if it cannot sell enough assets, potentially diluting existing shareholders.
A Citigroup spokesman in Hong Kong was not immediately available to comment on its smaller reported cash need. The bank can easily cover any shortfall and is considering several options to close its gap, the New York Times said.
(Editing by David Holmes)