It’s the age of cheap money for banks again. Not long ago, it was assumed that any bank being told to raise capital would have a hell of a time doing so, and that the most likely path towards increasing Tangible Common Equity was to convert preferred shares to common.
But remarkably, the money is just flowing in, and it appears that even the bankers out raising the money are confused, which is not a good sign.
WSJ: Nonguaranteed debt sales and the conversion of preferred shares to common stock have generated roughly another $20 billion, for a total of $85 billion or more, giving most of the banks considerably more capital than U.S. regulators have required them to amass as they ride out the recession. Money is pouring in so fast that surprised bankers can hardly believe it, especially since most investors didn’t want to go near financial stocks just three months ago, even though they were nearly 40% cheaper.
“It’s easy to raise capital now,” one executive at a bank that recently raised capital through a public stock offering said Tuesday. Investors are “happy to gobble it up.”
Some investors who participated in recent bank-stock sales said the logic is simple: The likelihood that the economy will veer off a cliff is dwindling, and many banks look cheap on a price-to-earnings basis.
We’d also add that even banks coming out from under the TARP still maintain the implicit guarantee that they’ll be stabilised in a temporary crisis, though that protection probably does more for bondholders than common shareholders.
In any event, we were impressed with Bank of America (BAC) that for all its problems it was able to raise $33 billion, since the stress test results were released. Other bank raisers includ $8.6 billion and Morgan Stanley raising $6.9 billion. Goldman Sachs (GS) did a share sale, as well, though before the stress tests were announced.
So, who’s actually buying? Well, you and your unsophisticated money manager:
Mutual funds and other large institutional investors have been aggressive buyers in some of the stock offerings, according to people involved in the deals. Because lots of those investors had previously shunned bank stocks, they lagged behind the overall market when bank stocks rallied starting in March. This month’s frenzy of deals was a chance to increase exposure to the industry at a slight discount to the market price.