May 4, 2009 11:37 pm

US banks surge on test hopes

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US bank shares surged on Monday as investors bet that some of the country’s largest institutions will have to raise less capital than previously feared after this week’s release of the government’s “stress tests”.

The banks believed to have been told by regulators to shore up their balance sheets, such as Citigroup, Bank of America and Wells Fargo, led the sector higher amid investor optimism that their capital needs will be manageable.

Wells rose more than 23 per cent to $24.25, in spite of reports that regulators had told the San Francisco-based lender to raise more capital, after Warren Buffett, one of its largest investors, called it a “fabulous” bank. Wells declined to comment on the tests.

The rally in the financial sector, coupled with positive US housing data, helped the stock market higher and created a benign backdrop for the last, tense hours of negotiations between bank executives and regulators over the tests.

Monday was the last opportunity for banks to convince regulators that the preliminary results of the tests were too pessimistic, and try to reduce the amount of new equity capital they have been asked to raise.

The government will inform the 19 banks that participated in the exercise of the final results and their capital requirements on Tuesday. There will be a public announcement on Thursday.

The White House soothed investors’ nerves further when spokesman Robert Gibbs said the administration did not see a need to ask Congress for fresh funds to support financial groups. Mr Gibbs added that banks would be encouraged to seek capital from non-government investors.

BofA closed more than 19 per cent higher at $10.38 after the FT reported that preliminary results of its stress test showed it needed more than $10bn in new capital. BofA said it had not yet been given a “final number” by regulators and said it was not working to raise more than $10bn.

Citi, whose capital requirements could also total up to $10bn, closed more than 7 per cent higher at $3.20. Investors in both Citi and BofA said that even if the banks were asked to raise some $10bn each in new equity, they would be able to do it without too much disruption by converting preferred shares held by the government and investors.

Some analysts had estimated that Citi, BofA and others would be forced to raise much higher sums. “If it is really just $10bn each, that is easy. Both banks have enough preferred shares to be able to do it and investors would take that in their stride,” one fund manager said.

A warning by Standard & Poor’s that it might downgrade 23 US banks, including Citi, BofA and Wells, amid fears over rising loan losses, did little to dampen investors’ spirits.

Additional reporting by Greg Farrell in New York

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