Three big U.S. banks raced to sell stock after the U.S. government said top financial firms have a $75 billion hole in their capital, while first-quarter results from two European banks showed bad debts are soaring.
U.S. regulators told 10 of the biggest U.S. banks late on Thursday to raise a total of $74.6 billion, which was less than investors once feared and helped lift European and U.S. bank shares early on Friday.
The relatively modest size of the hole found by regulators, after stress tests on the nation's 19 biggest banks, led to applause from investors who believe the worst is over but also skepticism among those who think the tests weren't rigorous enough.
Morgan Stanley said it sold $3.5 billion in stock Friday morning, and Wells Fargo & Co said it sold $7.5 billion in stock. Both deals were larger than expected but came at discounts of more than 11 percent to Thursday's prices.
Bank of America Corp said it would sell 1.25 billion shares, after the government told the bank it had a $33.9 billion equity capital shortfall. The largest U.S. bank said that in addition to selling shares, it would sell assets and take other steps to fill the hole.
Bank of America is better able to raise capital than the government estimated in its tests, Chief Executive Kenneth Lewis said in the interview with CNBC on Friday.
Bank of America shares climbed about 10 percent in premarket trading despite the impending dilution to current shareholders from a stock sale.
It does seem to be counterintuitive, Lewis said with a smile. But he added more seriously that the rise in the shares reflected the clarity and certainty brought about by the release of the stress test results.
U.S. bank shares were broadly higher in early trading, although Morgan Stanley shares slipped 6.4 percent to $25.39 after it said it had sold 146 million shares at $24.00 each. Wells Fargo shares edged higher to $24.89 after the bank said it sold 341 million shares at $22.00 each.
Bank of America shares were up 4.0 percent to $14.05.
Morgan Stanley also sold $4 billion of senior notes on Friday, split evenly between 5-year and 10-year debt, as a step toward repaying $10 billion of capital received last fall under the Treasury's Troubled Asset Relief Program.
Morgan Stanley, Goldman Sachs Group Inc and JPMorgan Chase & Co are all hoping to repay their TARP money soon, in part to avoid pay restrictions that come attached to the funds. The U.S. Treasury is set to soon release guidelines about pay at major banks.
Bank of America's Lewis was upbeat on the economy, saying he still expects to see signs of a turnaround in the second half of the year.
But 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 slim January-March loss after bad debts quadrupled to 2.9 billion 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 made an 861 million euro ($1.2 billion) loss in 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.
The Frankfurt-based bank, which has been hit by writedowns on debt products related to the U.S. residential mortgage market, unveiled bullish targets as part of a planned overhaul, which included a reshuffle of its board.
The DJ Stoxx Banking sector rose 2.2 percent to 182.2. The index has doubled in the past two months.
(Additional reporting by Karey Wutkowski and David Lawder in Washington; Writing by Dan Lalor; Editing by Greg Mahlich and John Wallace)