U.S. banks including PNC Financial Services Group
Banks have long been reluctant to pay for assets using stock when prices are as low as they are now, and issuing more stock would reduce the value of their shares even more. But as U.S. regulators craft capital rules that could be severe, banks feel pressed to raise equity capital, analysts said.
Banks' willingness to issue shares shows they may fear regulators more than shareholders now, which illustrates how the financial crisis has created a shift in the balance of power in the banking world. Banks' need to keep their equity capital high may limit future acquisitions activity, analysts said.
PNC said on Monday that it is buying Royal Bank of Canada's
Capital One is going a similar route in paying for its $9 billion acquisition of ING's
The new Capital One equity, which will amount to more than 20 percent of the company's market value, will hang over trading in its shares this year and next, analysts said.
In the past, it was not unusual for relatively strong banks to skip such stock sales. They had leeway to allow their equity capital levels to dip initially when they paid for modest-size acquisitions. Their ongoing earnings would rebuild their cushion against losses soon enough.
That make-it-up-later option is effectively gone now because regulators are pushing banks to top off their capital, said analyst Richard Bove at Rochdale Securities.
The financing option is being lost even in cases in which relatively strong banks are picking up orphaned assets, which should please regulators.
We're getting equity requirements each time we do one of these acquisitions, Bove said.
RBC's 424 branches are losing money and their prospects are better with PNC, which is known for overhauling the broken National City Corp after buying it during the worst of the financial crisis.
Spokespersons for Capital One and PNC declined to comment for this story.
A KNOWN UNKNOWN
But on conference calls, executives for the big banks said that regulatory pressure is real.
PNC, the sixth-biggest U.S. bank by assets, expects regulators to classify it as a systemically important financial institution, or SIFI, and require it to keep an extra buffer against losses and having to be bailed out.
PNC does not know how much that surcharge will be, so it included in the deal the option to issue $1 billion of stock to RBC, said William Demchak, senior vice chairman of PNC, on a conference call with investors on Monday.
It is an unknown at this point and not to put it in there as a possibility, I think, was wrong, he said.
People are still trying to figure out exactly where the capital standards will lie, Gary Perlin, chief financial officer of Capital One, said on a conference call Thursday. That is one reason there have not been many bank mergers and acquisitions lately, he said.
Perlin said Capital One's deal for ING Direct will be the first major bank acquisition to undergo a new regime of stress tests from regulators before being approved.
Although there is no such thing as a pre-approval, we have tried to reach out and work as closely as we can with a large number of regulators in advance to make sure the deal will pass their tests, Perlin said.
By the time Capital One issues the new stock and closes the deal, the bank expects at year-end to have raised its common equity capital from 8.4 percent of risk-weighted assets in March to 9 percent, a level bank executives believe regulators will judge to be prudent.
Michael Taiano, an analyst at Sandler O'Neill, said Capital One may be issuing more stock than it really needs to satisfy regulators.
Still, you want to err on the side of caution with regulators getting tougher, Taiano added. You don't want to be put in a position where you think it is one thing and it ends up being another.
(Reporting by David Henry; editing by Gunna Dickson)