Recent Bank Share-Sales May Set Off Industry-Wide Sell-off

(MoneyWatch)  My BNET Finance colleague Alain Sherter highlights an interesting phenomenon in a post here yesterday:

Beaten down regional banks badly need capital, and they think know where to find it: the public market.

Zions, a $53 billion-asset banking company based in Utah, on Thursday affirmed its plan to raise $250 million in a secondary stock offering. Another large regional player, Synovus, earlier this week announced it would seek to raise up $350 million in a stock offering, part of a broader plan by the Georgia company to add $500 million in capital. Also this month, Ohio's Huntington Bancshares said it plans a stock offering expected to raise up to $150 million.

This is something that I predicted would become a trend back at the start of the month (see story here), when it became apparent that small and medium-sized banks would have to raise up to $21 billion from investors in the event of a 20 percent market downturn.

Banks, I argued then, would begin to employ the same kinds of financing tactics that small biotechnology firms do, raising capital when they can (that is, when their stock price is high), as opposed to when they have to because of a liquidity crisis.

Alain writes that "the stock offerings will test the market's confidence that regional banks can bounce back." As an example, he points to Nasdaq-listed Zions Bancorporation. Zions is an excellent example of a bank financing itself very much as a pre-revenue firm does. While the stock is down 25 percent year-to-date, it has risen 38 percent in the past 3 months.

That's some serious volatility: Zions is underperforming the S&P 500, of which it is a tiny component, by around 40 percentage points on the year, but it is outperforming the index by 22 percentage points in the past 3 months. It is one of the reasons leveraged quantitative index funds such as the recently-launched CSM 130/30 index ETF ramped up short exposure in the stock late last month.

After a share-sale, it's common for a stock's value to fall a bit. But the risk with this capital raising strategy for banks is that they don't resemble pre-revenue firms in the sense that they all have more-or-less the same operating criteria and capital-shortage timelines. As a result, one or two small bank share-sales at once might well set off a collective sell-off in the industry, forcing their already badly-capitalized rivals into a tight squeeze.

Needless to say, that will lead to more bankruptcies, much more industry consolidation, and a further round of cash-hoarding.