Shareholders take brunt of banks' capital raising

[June 21, 2008]  NEW YORK (AP) -- America's banks and brokerages are scrambling to raise badly needed cash, but it may be at the expense of shareholders.

Since the subprime mortgage market imploded, financial companies caught in the fallout have been raising capital in two major ways - cutting dividends and issuing more shares. Both methods erode shareholder value; analysts believe the industry is poised for more.

"The market is now seeing a substantial increase in financial companies issuing common and convertible instruments in an effort to shore up liquidity," said Standard & Poor's senior index analyst Howard Silverblatt. "The additional financing gives them immediate breathing room, with the payback being longer term dilution."

Put plainly, their gain is your pain.

Just this past week, Fifth Third Bancorp Chief Executive Kevin Kabat needed a cash infusion of $2 billion to bail out his struggling regional bank, while KeyCorp CEO Henry Meyer needed $1.5 billion. Both will issue stock to boost their balance sheets.

Banks have raised more than $60 billion this year by selling common and preferred shares.

The issuance of new stock acts to dilute the value of current shareholders because profit gets split among more shares. It's like having the family over for a turkey dinner and at the last minute grandpa invites the neighbors, too. There'll be less for everybody.

Meanwhile, the regular stock dividends investors have counted on from banks are shrinking. Citigroup Inc., Wachovia Corp. and KeyCorp are among 16 U.S. banks that slashed dividends during the first six months of 2008 - that's more dividend trimming in the sector than the past five years combined.

The entire S&P 500 doled out $61.72 billion worth of dividends during the first quarter - down from $67.09 billion during the fourth quarter of 2007.

Financial companies accounted for 12.35 percent of the first quarter dividends, a sharp decline from 22.3 percent during the fourth quarter and 28.68 percent during the third quarter.

And, with major banks set to report second-quarter earnings next month, investors will likely suffer through more write-downs. Already Citigroup Inc. Chief Financial Officer Gary Crittenden warned investors that the bank will take substantial charges in the second quarter, though they won't exceed the $6 billion that Citi recorded in the first quarter.

Since last summer, global banks and brokerages have written down nearly $300 billion from wrong-way bets in mortgage-backed securities and other risky investments. Some analysts say that amount could climb much higher.

Fitch Ratings estimates that the mortgage crisis has cost banks $400 billion in losses so far, and the International Monetary Fund said in a report that the amount may rise to nearly $1 trillion before the credit crisis is over.

Analysts at JPMorgan Chase & Co., Merrill Lynch & Co. and UBS AG all said this week that banks may have to cut dividends further and raise more capital to cover losses.

Not all of the banks are feeling the same pain. Huntington Bancshares Inc. said this week that its credit quality is not on the verge of buckling, while SunTrust Banks Inc. announced Friday it does not foresee having to cut its dividend or issue new stock to raise capital.

But the rest of the sector might need to raise $65 billion more as losses and write-downs extend into 2009's first quarter, according to Goldman Sachs analyst Richard Ramsden. He lowered the price targets on 14 banking companies, and slashed earnings per share forecasts for 11 of them.

All of this comes amid one of the most brutal years for financial stocks since they plunged in 1998 after Russia defaulted on its government bonds and caused investors to unwind positions in emerging market debt. The KBW Bank Index, which includes 24 financial companies, has slid about 19 percent in June. And major institutions from Lehman Brothers Holdings Inc. to regional banks like Wachovia Corp. are all hovering near record lows.

"Banks will not turn until a peak in credit costs is in sight," Ramsden said.

[Associated Press; By JOE BEL BRUNO]

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