By Ari Levy for Bloomberg, June 22, 2009
Morgan Stanley,Goldman Sachs Group Inc. and American Express Co. helped an index of firms that accepted U.S. rescue funds to outperform bank-stock benchmarks this year.
The Bloomberg U.S. Treasury Capital Purchase Program Index dropped 12 percent through June 17, when 10 of the biggest financial firms returned federal bailout funds. That’s half the decline in the Standard & Poor’s 500 Banks Index and Nasdaq Bank Index. Morgan Stanley advanced 71 percent and Goldman Sachs added 66 percent; American Express gained 29 percent.
The Bloomberg index covers 252 companies that took money from the Troubled Asset Relief Program and includes investment banking, credit-card and money-management firms, which are less tied to slumping real estate markets. The S&P and Nasdaq indexes focus on lenders with branch networks. Six of the 10 firms to repay the U.S. last week weren’t retail banks, and each beat the regular bank indexes by at least 22 percentage points.
“They’re seeing pockets of strength in their business models,” said Blake Howells, an analyst at Becker Capital Management, which oversees $1.8 billion in Portland, Oregon. Retail banks “have a couple quarters of slogging through some high provisions and elevated losses.”
Goldman Sachs and Morgan Stanley, credit-card lender American Express and custody banks State Street Corp., Bank of New York Mellon Corp. and Northern Trust Corp. paid back a combined $30 billion in TARP funds on June 17, in a step toward eliminating government restrictions on lending and compensation.
No Guarantees
Accepting TARP didn’t guarantee outperformance. Among JPMorgan Chase & Co., U.S. Bancorp, BB&T Corp. and Capital One Financial Corp., which returned a total of $38.3 billion to the U.S. last week, only JPMorgan beat the TARP index with a 3.8 percent advance.
The best gainer in the index was First Defiance Financial Corp., a Defiance, Ohio-based lender with a market value of about $112 million and $37 million in federal bailout funds. The company, which has remained profitable and reported first- quarter gains tied to mortgage banking, rose 78 percent.
The government profited on its investments in the companies that repaid, by receiving 5 percent quarterly dividends before the principal repayments. The Treasury also demanded warrants, the right to buy common stock at a set price for 10 years, to benefit as the shares rise. Some banks including JPMorgan have announced plans to repurchase the warrants at prices that still must be negotiated.
TARP Holdouts
Three of the four top U.S. lenders, Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. have yet to pay back a combined $115 billion in TARP funds. Citigroup, down 54 percent through June 17, is the biggest contributor to the TARP index’s drop, followed by Wells Fargo, which tumbled 22 percent. Bank of America’s 13 percent drop represents the fourth-biggest contribution, behind SunTrust Banks Inc. Three-quarters of the index’s members have fallen this year.
Already faced with rising loan losses from record home foreclosures and soaring unemployment, banks may soon be forced to navigate around increased government oversight. President Barack Obama proposed an overhaul of the regulatory system last week, including the creation of an agency for monitoring consumer financial products and making the Federal Reserve the overseer of companies deemed too big to fail.
“They’re going to err on the side of over-regulating, which is going to suppress profit,” said Douglas Ciocca, who helps oversee $1.7 billion at Renaissance Financial Corp., in Leawood, Kansas. “The enticement of that model from a profit growth perspective right now is very obscure.”
Fixed-Income Trading
Goldman Sachs and Morgan Stanley, both based in New York, have been bolstered by a recovery in fixed-income trading and share-sale underwriting. The firms converted into banks in September after Lehman Brothers Holdings Inc.’s bankruptcy, and tapped the industry rescue program a month later.
Their share prices have recovered to about where they were before Lehman’s filing, in part because of the government’s rescue efforts, said Eric Barden, chief investment officer of Barden Capital Management in Austin, Texas.
“You have these leading companies that were getting priced for Armageddon and that Armageddon is no longer a strong possibility,” said Barden, whose firm oversees $45 million. “The actual wound has pretty much healed. Now we’re in the recovery period.”
American Express, up 29 percent, became a bank in December to gain government financing and retail deposits as credit-card defaults rise. The New York-based company sold $500 million of stock earlier this month, proving its ability to raise cash on its own.
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