As JP Morgan, AMEX, Morgan Stanley & BoA Raise Billions, Barclays Fires Warning Shot
Capital-raising season is getting well underway, but that may pose a new problem for banks: higher share prices and a more diversified investor base.
Amid a flight among investors back to risk, big banks are shrugging off the stringent last-minute capital-raising constraints placed on them by Federal Reserve officials late last month.
Ownership divestments, private placements and equity share sales are all accounting for the return of liquid bank balance sheets.
Monday, JP Morgan and American Express announced that they would sell new common stock in order to try and repay government money they got last year in the midst of the financial crisis. JP Morgan is looking to raise a whopping $5 billion, while American Express wants $500 million.
Meanwhile, Morgan Stanley said earlier today that it is planning a $2.2 billion stock offering, in a deal expected to include Asian giants China Investment Corporation and Mitsubishi UFJ. That sale may raise eyebrows of existing investors, since it is likely to dilute shareholders' stakes by around 7 percent.
And Bank of America reported Tuesday morning that it has already raised some $33 billion of the $33.9 billion it was required to come up with by the Federal Reserve's Supervisory Capital Assesment. Bank of America now expects to "comfortably exceed" the $33.9 billion number in total capital raised.
On a related note, last week private equity groups Fortress Investment, Crestview Partners and Lightyear Capital agreed to inject as much as $150 million each into Florida-based First Southern Bancorp. That follows a similar private equity investment recently by Blackstone and Carlyle into another Florida-based bank, BankUnited, in late May.
The Risks of Multiple Shareholders
Things are certainly looking rosier for the banking sector, at least in terms of coming up with the capital institutions need to make loans, do deals and increase their risk (and hence return) profiles in general. Ironically however, if they turn their balance sheets around too soon, then many banks may find themselves the victims of their own success.
A warning shot was fired across the Atlantic Tuesday morning, when Abu Dhabi-based International Petroleum Investment Company announced that it was selling 1.3 billion shares of British bank Barclays, prompting a giant plunge in the stock price.
While IPIC managing director H.E. Khadem Al Qubaisi said that Abu Dhabi intends to maintain a "close commercial and strategic relationship" with Barclays, you can bet that he was only too happy to divest while the formerly beaten-down share price of the bank was finally seeing some respite from the selling.
U.S. banks may soon face similar problems. While their recent capital-raising activities appear for the moment to be success stories, a rally lately in financial stocks may present foreign investors who have held on for the past year a long-awaited exit point.
While much of that selling should be absorbed by a strong market environment, any change in sentiment -- coupled with selling by foreign investors -- would put the banks back in similar positions to where they were at the end of the first quarter this year: on the hunt for cash again.
Capital-raising comes with a big caveat, too: more shareholders, in more locations across the world. And that requires water-tight shareholder relations practices.
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