PNC, BNY Mellon will do well in stress test, analysts predict

May 03, 2009 (The Pittsburgh Tribune-Review - McClatchy-Tribune Information Services via COMTEX) -- PNC | Quote | Chart | News | PowerRating -- Pittsburgh's biggest banks will do fine when the government posts grades for the health of America's 19 biggest financial institutions later this week.

According to industry experts' evaluations, PNC Financial Services Group and Bank of New York Mellon Corp. are each fairly well fortified against financial losses that will most likely continue until the economy turns around.

The Federal Reserve and Treasury Department ordered unprecedented "stress tests" on the nation's largest financial institutions in late February on the belief it will require strong banks to pull America out of the worst economic downturn since the Great Depression.

Regulators evaluated the 19 institutions from March through April as to how prepared they are to ride out a recession that could last until 2011. Namely: Do these major banks have enough of a capital cushion to absorb big losses on loans and securities that will probably go sour?

The bottom line is that Washington wants to be doubly sure bank deposits are safe and lenders keep extending credit as the recession pressures banks.

"Irrespective of what gets released on Monday or thereafter, depositors have no need to rush out and move their money around," said Tony Carfang, partner at Treasury Strategies, Chicago, which is a consultant for major banks worldwide, including in Pittsburgh.

Carfang said the Federal Deposit Insurance Corp. insures deposits up to $250,000 per account. And insurance on checking accounts has no limit, a policy the FDIC adopted last fall to safeguard employers' payrolls, he said.

If the stress tests show the institutions don't seem to have enough money in reserve, known as capital, the government will give them six months to raise more, according to government documents released April 24.

More than $1T

When the government announced it would conduct the stress tests, Treasury Secretary Timothy Geithner estimated the nation's banks might need more than $1 trillion in capital to ride out the recession.

The institutions can either set aside some of their profits (which are harder to come by in this economy), raise money by selling stock on Wall Street, or sell stock to the government as part of the $700 billion Troubled Asset Relief Program known as TARP.

The government previously said it would release the results Monday, but last week decided to delay it until Thursday -- largely because the banks and government are debating what and how much should be made public.

"I don't think the results will come out Monday because I don't think they're ready," Carfang said.

He and other experts worry that by publicizing a bank's need to raise capital, it will make it that much harder -- and more expensive -- for that bank to secure capital investment.

"Just the existence of these stress tests has fueled uncertainty and destroyed the share prices of some banks," he said. "With each day, I think the government recognizes the consequences of putting a target on banks' backs. Their actions are going to move (stock) markets because they are picking winners and losers."

Weathering a storm

The government wants to know, for instance, how the institutions would weather unemployment as bad as 10.3 percent next year compared to the current 8.5 percent and protracted declines in housing prices and the nation's economic output.

The main economic indicators continue to look very weak. For instance, the Commerce Department reported last week that gross domestic product -- the value of goods and services the nation produces -- shrank at a dismal 6.1 percent annual rate in the January-March quarter. That was worse than most economists expected, and followed a 6.3 percent drop reported in the October-December quarter.

"PNC currently has a comfortable amount of capital and will likely report positive (earnings) over the next couple of years," said Matt O'Connor, an analyst for Deutsche Bank, which did its own stress test on 16 of the 19 banks including PNC.

Bank of New York Mellon will not need to significantly pad its capital cushion, according to SNL Financial, a research firm in Charlottesville, Va. Reason is, BNY Mellon is more an investment manager and securities custodian than a traditional lending bank, so it doesn't have as many loans that could go bad, he said.

"It seems unlikely Bank of New York Mellon will come out of the stress test having to build reserves. They have a lot of capital," said Nathan Stovall, senior industry editor for SNL Financial.

Spokesmen for PNC and BNY Mellon for each of the banks declined to comment.

The government briefed the 19 banks on their test results last week but federal regulations specifically prohibit the banks from publicly discussing them.

Big banks falling short

For the stress tests, Treasury and the Federal Reserve evaluated domestic bank holding companies with at least $100 billion in assets. That included three of the four biggest banks with branches in the Pittsburgh area: PNC, BNY Mellon and Fifth Third Bancorp.

Pittsburgh's third-largest bank, Citizens Financial Group, has about $160 billion in assets. But because it is not a domestic institution -- it's owned by Royal Bank of Scotland -- Citizens was not among those 19 stress-tested.

Citigroup and Bank of America -- the two of the nation's three biggest banks -- appear very short on capital, according to several experts.

Using the government's litmus tests, SNL Financial estimates Citigroup needs to add about $92 billion in capital to cover anticipated losses this year and next. Bank of America, the nation's biggest bank, probably needs to come up with about $144 billion.

Another bank needing to come up with more capital could be Fifth Third, say experts.

The Cincinnati-based bank, which has 12 branches in the Pittsburgh area, may need about $8 billion more in capital, said evaluations by both Morgan Stanley and SNL Financial, using government yardsticks. That's much less capital than what's needed at Citigroup, which is 16 times larger than Fifth Third.

"They went into this (test) with weaker capital levels," said Stovall. He said Fifth Third operates in Midwest markets struggling with higher unemployment rates than the rest of the nation.

By comparison, PNC might need another $32 billion. But PNC is three times larger than Fifth Third and can earn more money that can be socked away.

"PNC's earnings could definitely fill that hole," said Stovall.

Huge losses

The weak economy -- coupled with banks' poor lending and investments a few years earlier -- have cost banks dearly, said Federal Reserve documents. From mid-2007 through 2008, the nation's 19 biggest banks lost about $400 billion from bad loans and securities.

"Those are onerous charge-offs, beyond anything the industry has experienced," said John Koelmel, CEO of First Niagara Financial Group. It is the Buffalo-area bank acquiring 57 area branches from PNC.

"With these stress tests, the government is taking it to a worst-case scenario," said Koelmel. He also thinks regulators will put the screws to regional banks like his before the year is out.

"I think all of us will face some variation of a stress test," the CEO said.

Thomas Olson can be reached at tolson@tribweb.com or 412-320-7854.

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