Morgan Stanley and Wells Fargo sold more than $15 billion of shares and bonds, as the two companies rushed to the head of the line of banks looking to raise funds following government stress tests.
Bank of America Corp got in line too, saying it plans to sell 1.25 billion shares to help meet what the government deemed a $33.9 billion capital shortfall for the lender. Banks are hoping to sell shares fast, in case the soaring stock market starts to retreat, analysts said.
If I were running a bank, I would sell stock now, too. It's a great time to ride the wave, said Joshua Siegel, managing principal at StoneCastle Partners, which owns Bank of America and JPMorgan Chase & Co shares.
U.S. regulators late Thursday announced the results of its stress test of the 19 largest banks, and the relatively small size of the $75-billion capital shortfall heartened European and U.S. bank investors and emboldened issuers.
But the results also evoked skepticism among those who contend the tests were not rigorous enough.
The KBW index of U.S. bank stocks rose 12.1 percent. Bank of America, whose shares have risen more than fourfold since early March, closed on Friday up 4.9 percent for the day at $14.17.
Morgan Stanley sold $4.03 billion in stock Friday, including overallotment shares, while Wells Fargo & Co sold $8.6 billion. Both deals were larger than expected, but came at discounts of more than 11 percent to their Thursday closing prices.
With the stress tests over, U.S. President Barack Obama's administration plans to focus on reforming regulation of the financial sector, including setting up a systemic risk regulator, sources told Reuters.
Despite the extra stock entering the market, Morgan Stanley's shares rose 3.9 percent to close at $28.20. The stress test said Morgan Stanley needed to boost its common equity capital buffer by $1.8 billion.
Wells Fargo shares rose 13.8 percent to $28.18. The U.S. stress test found that Wells Fargo needed another $13.7 billion.
The biggest gainer Friday was Cincinnati regional bank Fifth Third Bancorp, which soared 58.8 percent to $8.49 a share, its highest price in four months. The bank needs to boost common equity capital by $1.1 billion, according to the stress test.
Of the lenders that had to raise money, auto and home lender GMAC LLC was deemed to have an $11.5 billion shortfall, by far the largest deficiency relative to its size. U.S. Treasury Secretary Timothy Geithner told Reuters Television on Friday that President Barack Obama's administration will provide substantial support to GMAC.
Whether the equity market goes up or down in the near term, demand for bank stocks is finite, and it makes sense to try to issue first, said Brad Hintz, analyst at Sanford C. Bernstein.
There are a whole lot of hungry banks stepping up to the banquet table. They know if they're not first in line, there might not be any shrimp left on the table for them, he said.
In addition to offering shares, Bank of America plans to sell assets to satisfy regulators. The bank is better able to raise capital than the government estimated in its tests, Chief Executive Kenneth Lewis told CNBC television on Friday.
Bank of America sold $3 billion of non-government guaranteed debt maturing in five years, a key condition for banks looking to pay back money they received under the Troubled Asset Relief Program.
Banks are keen to get out from TARP, in part because of pay restrictions for banks in the program. The government plans to soon detail the specifics of how the pay restrictions work, according to a document obtained by Reuters on Friday.
Leaving TARP may be more difficult than banks think, but the interest in returning government money reflects bank optimism that the worst may have passed in financial markets.
Bank of America's Lewis was upbeat on the economy, saying on CNBC he still expects to see signs of a turnaround in the second half of the year.
Goldman CEO Lloyd Blankfein said at the bank's annual meeting on Friday that the end to the crisis is in sight and markets are cheerier.
Hours before Blankfein's observation, the U.S. Department of Labor reported that unemployment rose to 8.9 percent, the highest since September 1983.
Banks globally remain under pressure as rising unemployment and sinking house prices drive loan losses.
In Europe, top banks continued to show the impact of the recession as companies and consumers are increasingly running into trouble.
Royal Bank of Scotland, now 70 percent state-owned, fell to a loss in the first three months of 2009 after bad debts quadrupled to 2.9 billion pounds and it took a 2.1 billion pound writedown on risky assets.
(We expect) a slowdown in financial market activity compared with the very buoyant conditions seen in Q1, Chief Executive Stephen Hester said.
Meanwhile, Germany's Commerzbank reported an 861 million euro ($1.2 billion) loss for the quarter, after a 1.2 billion euro charge from the investment bank and a 54 million euro charge from its commercial real estate unit.
(Additional reporting by Joe Giannone in New York, Karey Wutkowski and David Lawder in Washington; Writing by Dan Lalor; Editing by John Wallace, Steve Orlofsky and Tim Dobbyn)