Banks Will Struggle Raising Capital in 2010

Last Updated Jan 4, 2010 5:10 PM EST

One reason the banking sector came back to life last year was because investors answered the call when industry players sought to raise money.

But banks may be a tougher sell in 2010, according to Sandler O'Neill. Notes the boutique investment bank in a new report (no public link):

. . . bank investors have become far more discriminating in the last few months. This selectivity, combined with concerns about further dilution, have now caused investors to view the capital environment more cautiously. Investors seem much less willing simply to provide capital to any bank that requests it, implying that there is less capital available to those who need it most (and if it is available, it is increasingly only supplied at very punitive prices).
That would spell trouble. Many banks are still trying to dig themselves out of the credit hole and need dough. Global financial regulators are also expected later this year to announce higher capital requirements (although those will be phased in gradually). And the feds are letting banks exit TARP only on condition that they have enough reserves to weather future shocks.

Not that raising money ensures or predicts a smooth recovery. Huntington Bancshares (HBAN), which last fall tapped investors in a $400 million follow-on offering, continues to struggle. Same goes for Synovus (SNV), whose shares are puttering along at $2.10 despite the banking company in September raising $600 million.

The litmus test for these and other banks is whether new capital ultimately drives growth or merely stanches the bleeding from wounded loans.

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    Alain Sherter covers business and economic affairs for CBSNews.com.