The repayment by the nation's largest banks of government capital received in the bank bailout may turn a not so welcome spotlight on the large regional banks that still have not repaid the government debt. This is the last thing any bank needs as it works through the credit cycle.
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During the Bush Administration, the U.S. Treasury initiated the Capital Purchase Program (CPP) under the Troubled Asset Relief Program (TARP) to help stabilize the financial system. The CPP involved the federal government investing hundreds of billions of dollars in the banking system to shore up capital and stem the panic that was building among depositors. The government received preferred stock that paid dividends and obtained warrants to purchase bank stock. (To learn more about warrants, read What Are Warrants?)
In December 2009, Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) became the last of the big seven banks to either redeem or announce the intention to redeem the outstanding preferred stock owned by the government. Wells Fargo received an investment of $25 billion from the government, while Citigroup received $45 billion.
After the final paybacks, Congress no longer has any hold over the largest banks in the U.S. However, Congress may turn its attention to the smaller regional banks in a quest to redeem its investment. Although regional banks were given a smaller allocation of TARP funds, they have a greater percentage TARP funds to market value due to their small balance sheets. All banks are currently under political pressure to increase lending to stimulate economic growth.
Also, banks that have TARP capital outstanding still must abide by corporate executive bonus restrictions imposed by the government. A case can be made that it is less important for the regional banks to be competitive on pay because they are not in the same type of businesses as the larger banks, which typically have investment banking and trading operations.
SunTrust (NYSE:STI) received $3.5 billion, and it is one of the largest banks that hasn't redeemed TARP funds yet, although it intends to do so shortly. The bank is the seventh largest in the U.S., with assets of $173 billion at the end of the third quarter of 2009. SunTrust is in good condition capital-wise, with a Tier 1 capital ratio of 9.31% excluding TARP funds.
Comerica (NYSE:CMA) received $2.25 billion in TARP money, and also has not redeemed the preferred stock yet. The bank charged off $239 million of net credit losses in the third quarter of 2009 and outlook for 2010 remains uncertain. Another reason to redeem TARP as soon as practical is the cost of the funds. Comerica pays $34 million every quarter to the U.S. Treasury in dividends.
PNC Financial (NYSE:PNC) received $7.6 billion under the CPP, and has expressed its intention to repay the funds when appropriate to shareholder interest and subject to regulatory approval. PNC Financial has been hit hard by the recession and has 3.19% of its outstanding loans classified as non-performing, representing a small increase from previous quarters.
The regional banks may receive more political attention than they are used to once the last of the largest banks repay government capital received under the TARP. This will only make it harder for banks to manage their businesses through the continued weak economy. (To understand the financial health of your bank, read Is Your Bank On Its Way Down?)
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