Citigroup Inc and Bank of America Corp shares rallied in premarket trading ahead of the release of stress test results that will force them and other top banks to raise tens of billions of dollars in capital.
The results of government stress tests of the ability of the 19 largest U.S. banks to weather a deep recession were to be released at 5 p.m. EDT (2100 GMT) Thursday and are expected to show about half the banks need more capital.
U.S. Treasury Secretary Timothy Geithner, who along with other top regulators will brief the media on the test results, said in an opinion piece in The New York Times that he expects banks will pay back more than the $25 billion of government rescue funds that he had previously estimated.
Geithner also wrote that the stress tests applied exacting loss estimates and conservative earnings estimates, an apparent rebuff to critics who have questioned whether the tests were tough enough.
But skeptics still abound.
Although there are signs of economic improvement, they are not yet strong enough to suggest that the banking industry will not need significant capital in addition to the Treasury-announced capital requirements, analysts at Keefe, Bruyette and Woods wrote in a note to clients.
While the capital shortfalls reported so far are much larger than analysts had expected, bank shares have been soaring as investors get more clarity over how well the industry will cope with perhaps the most severe recession since World War Two.
Among banks needing capital, Bank of America shares were up 15.5 percent in premarket trading on Thursday, Citigroup rose 12.7 percent, and Wells Fargo & Co gained 4.9 percent. The Select Sector SPDR Financial ETF was 5.3 percent higher.
Debt protection costs for several major financial institutions, including Citigroup and Morgan Stanley, fell Thursday morning following the reports on stress test results.
Regulators have told Bank of America it needs $34 billion, while Citigroup needs $5 billion and auto and mortgage lender GMAC LLC needs $11.5 billion, according to sources familiar with the matter.
Bank of America shares were boosted by two analyst upgrades, by Stifel Nicolaus and Robert W. Baird & Co, with the latter calling the largest U.S. bank's capital needs manageable.
Citigroup's capital needs reflect its previously announced plan to convert some preferred shares into common stock.
Wells Fargo needs $15 billion, Morgan Stanley needs $1.5 billion, and Regions Financial Corp needs some capital, The Wall Street Journal said.
Bank of New York Mellon Corp does not need capital, a person familiar with the matter said.
American Express Co, Capital One Financial Corp, Goldman Sachs Group Inc, JPMorgan Chase & Co and MetLife Inc also do not need capital, the Journal said.
All the companies declined to comment.
The various sources reporting the stress test results were not authorized to speak because the results are not yet public.
Banks may cover any capital shortfalls through a mixture of asset sales, share sales and perhaps the conversion of preferred shares into common stock.
The government is giving banks needing capital one month to develop a plan to raise it, and until November 9 to finish the job. These banks must also review their management and boards of directors to ensure proper leadership.
Banks needing capital may ask to swap government preferred shares into mandatory convertible preferred shares, which allow the government to take equity stakes only as needed.
The banks cannot repay aid from the Troubled Asset Relief Program (TARP) until they issue debt not backed by the federal government, and for more than a five-year term.
If banks convert preferred shares issued under TARP, the government could become one of their biggest shareholders. The White House said it would await the stress test results before commenting on banks' potential management changes.
Analysts at Goldman Sachs estimated that banks' capital needs after the stress test would total $130 billion, with $100 billion needed by weak banks to plug holes and $30 billion needed by stronger banks to repay TARP funds.
Analysts believe other banks that may need capital include Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc and SunTrust Banks Inc.
(Additional reporting by Jonathan Stempel, Paritosh Bansal, Elinor Comlay and Dan Wilchins in NEW YORK; Karey Wutkowski, Mark Felsenthal, David Lawder, Glenn Somerville and Jeff Mason in WASHINGTON, D.C.; Douwe Miedema in LONDON; and Michael Flaherty and Parvathy Ullatil in HONG KONG; Editing by John Wallace)