Banks Looking for Some Perpetual Growth: Street Whispers
Trust preferred securities will stop being counted as Tier 1 common capital in new post-Dodd Frank Act and Basel III regulatory regimes, likely leading banks to redeem high-yielding securities issues - often carrying yields above 7% that reflect mid 2000s interest rate levels.
According to an Aug 17 Guggenheim Securities analysis, Bank of America and JPMorgan have over $20 billion of trust preferred securities up for redemption in the next year, followed by $17 billion-plus in redemptions at Wells Fargo. Morgan Stanley and Citigroup also have six and nine TRUPS up for redemption on September 20, respectively, which generally carry 6%-plus yields.
The big question is whether banks will look to replace those securities with other forms of hybrid capital -- perpetual preferreds -- that will count as equity by global regulators in coming years, and which may carry lower yields.
As trust preferred securities face an upcoming redemption schedule, some banks are replacing them with newly issued perpetual preferred securities - allowed in new regulatory regimes to count for roughly 1.5% of overall Tier 1 common capital - in refinancing's that may push down borrowing costs and increase interest-based earnings.
A recent $1.1 billion perpetual preferred offering by JPMorgan carrying a 5.5% yield and similar priced offerings by Wells Fargo, Capital One, BB&T and US Bancorp in recent months illustrate banks building low-yielding capital as billions in trust preferreds come up for redemption. Meanwhile, facing similar opportunities, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America have been notably silent in 2012.
In June the Federal Reserve proposed enhanced capital requirements for large banks that exclude most trust preferred shares from regulatory Tier 1 capital. Now, under the Federal Reserve's proposed new capital rules, banks will be able to use noncumulative perpetual preferred for between 1% and 1.5% of their Tier 1 risk-based capital ratios.
With recent perpetual preferred financings in the 5% to 6% range poised to replace trust preferred securities issued with yields as high as 7.5%, Marty Mosby, a banking sector analyst with Guggenheim Securities says that recent offerings are a way to build regulatory capital, while also giving balance sheet flexibility to increase lending in coming years.