I am now releasing the additional calculated capital requirements for several banks, with the full set of calculations available for download for free registered users. I am releasing my proprietary work to demonstrate to those who do not currently subscribe to BoomBustBlog the depth and breadth of this site's capabilities.
The Methodology Used
As stated in my original release of the Sun Trust Stress Test Analysis, I don't necessarily agree with the methodology and assumptions of the government's version of the stress test. For one, they don't risk weight earnings, only assets. Some of the investment banking operations take significant risks to generate earnings (see "Goldman Sachs Banking Secrets Mr. Geithner May Not Share With You!), and these actions pose systemic risk. In addition, the bar is too low to be considered truly stressful (eg. 8.4% average unemployment as a base case in an 8.5% unemployment environment, trending upwards). I have rectified the problem of floating government targets and expectations by creating a scenario analysis that covers multiple assumptions, thus the readers can decide for themselves which set of assumptions to use in order to arrive at what they feel would be the government's (or the most realistic) conclusion.
The following is a summary of my simulated government stress tests based upon the white paper released in the latter part of April 2009. See The Supervisory Capital Assessment Program: Design and Implementation 2009-04-30 02:16:44 286.90 Kb and Bank of Finland Recessionary Stress Testing Methodology 2009-04-30 02:18:39 306.64 Kb for methodology. For my personal accounts, I am assuming a 4% bar for Tangible Common Equity and a 6% bar for Tier One Capital. The actual bars have not been released publicly, to my knowledge. It has been stated in the media and dated government documents that the base case government estimates for unemployment was 8.4%. As previously mentioned, we believe that to be unrealistic (given that the latest government figures show 8.5% unemployment and trending upwards), hence we have used the more stringent RGE Monitor macro assumptions for the base case scenario and have reserved what we perceive as the government's stated parameters as the optimistic scenario.
Please be aware that these are illustrative analyses only, and we are not privy to the same access and information that may have went into the government's analysis of these companies. In addition, the government may have wavered from the stated implementation in the whitepaper released above. All in all, I believe this to be a fairly accurate representation of what one could expect from the government in the upcoming days.
The Scenario Analysis Summary for PNC Bank
Capital to be Raised
Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee PNC being in need of roughly $3.25 billion of additional capital causing approximately 18% in dilution among existing equity investors as of the closing price of the 1st of this month.
| 2010 End | base case - rge monitor | Adverse case | Optimistic case |
| Risk weighted Assets | 260,878 | 257,111 | 266,758 |
| Tier 1 risk-based capital | 27,948 | 27,125 | 28,802 |
| Tangible Assets | 285,435 | 281,138 | 292,144 |
| Tangible Equity | 8,299 | 7,476 | 9,153 |
| Tier One Capital | 10.7% | 10.6% | 10.8% |
| TEC | 2.91% | 2.66% | 3.13% |
| PNC Share price | 40.45 | ||
| Base Case Scenario | Min Tangible Equity Capital Ratio | Capital to be raised ($ mn) | TEC $ mn (post add capital ) | Tangible Assets $ mn (post add cap) | No of shares (mn) | Dilution Impact |
| 2010 estimates | 2.9% | 0 | 8,299 | 285,435 | 0.0 | 0.0% |
| 3.0% | 272 | 8,571 | 285,708 | 6.7 | 1.5% | |
| 3.5% | 1,753 | 10,052 | 287,188 | 43.3 | 9.7% | |
| 4.0% | 3,249 | 11,547 | 288,684 | 80.3 | 18.0% | |
| 4.5% | 4,760 | 13,059 | 290,195 | 117.7 | 26.4% | |
| 5.0% | 6,287 | 14,586 | 291,723 | 155.4 | 34.9% | |
| 5.5% | 7,831 | 16,130 | 293,266 | 193.6 | 43.5% | |
| 6.0% | 9,391 | 17,690 | 294,826 | 232.2 | 52.2% | |
| 6.5% | 10,967 | 19,266 | 296,403 | 271.1 | 60.9% | |
| 7.0% | 12,561 | 20,860 | 297,996 | 310.5 | 69.8% |
Download the full analysis (as a registered user) here: 
PNC Simulated Government Stress Test 2009-05-05 02:00:10 1.12 Mb
The Scenario Analysis Summary for Morgan Stanley
Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee Morgan Stanley not being in need of additional capital as of the closing price of the first of this month.
| 2010 End | Base case | Base Case | Adverse case | Optimistic case |
| Risk weighted Assets | 280,233 | 280,233 | 270,716 | 292,711 |
| Tier 1 risk-based capital | 40,374 | 40,374 | 37,110 | 43,846 |
| Tangible Assets | 659,107 | 659,107 | 636,618 | 688,597 |
| Tangible Equity | 28,965 | 28,965 | 25,701 | 32,437 |
| Tier One Capital | 14.4% | 14.4% | 13.7% | 15.0% |
| TEC | 4.39% | 4.39% | 4.04% | 4.71% |
| MS Share price | 23.07 | |||
| Base Case Scenario | Min Tangible Equity Capital Ratio | Capital to be raised ($ mn) | TEC $ mn (post add capital) | Tangible Assets $ mn (post add cap) | No of shares (mn) | Dilution Impact |
| 2010 estimates | 4.4% | 0 | 28,965 | 659,107 | 0.0 | 0.0% |
| 4.5% | 728 | 29,693 | 659,835 | 31.5 | 2.9% | |
| 5.0% | 4,201 | 33,165 | 663,308 | 182.1 | 16.8% | |
| 5.5% | 7,710 | 36,675 | 666,817 | 334.2 | 30.9% | |
| 6.0% | 11,257 | 40,222 | 670,364 | 488.0 | 45.1% | |
| 6.5% | 14,842 | 43,807 | 673,949 | 643.3 | 59.5% | |
| 7.0% | 18,465 | 47,430 | 677,572 | 800.4 | 74.0% |
Download the full analysis (as a registered user) here: MS Simulated Government Stress Test 2009-05-05 02:17:35 2.49 Mb
The Scenario Analysis Summary for Sun Trust Bank
Assuming the government requires a 4% minimum tangible equity capital ratio, we foresee Sun Trust being in need of roughly $1.5 billion of additional capital causing approximately 31.7% in dilution among existing equity investors, as of the closing price of the first of this month.
| 2010 End | Base Case | Adverse case | Optimistic case |
| Risk weighted Assets | 152,937 | 150,791 | 155,063 |
| Tier 1 risk-based capital | 13,653 | 12,358 | 14,959 |
| Tangible Assets | 165,245 | 162,825 | 167,642 |
| Tangible Equity | 5,121 | 3,826 | 6,427 |
| Tier One Capital | 8.9% | 8.2% | 9.6% |
| TEC | 3.10% | 2.35% | 3.83% |
| Sun Trust Share price | 13.71 | ||
| Base Case Scenario | Min Tangible Equity Capital Ratio | Capital to be raised ($ mn) | TEC $ mn (post add capital) | Tangible Assets $ mn (post add cap) | No of shares (mn) | Dilution Impact |
| 2010 estimates | 3.1% | 0 | 5,121 | 165,245 | 0.0 | 0.0% |
| 3.5% | 687 | 5,808 | 165,931 | 50.1 | 14.0% | |
| 4.0% | 1,551 | 6,672 | 166,796 | 113.1 | 31.7% | |
| 4.5% | 2,424 | 7,545 | 167,669 | 176.8 | 49.6% | |
| 5.0% | 3,307 | 8,428 | 168,551 | 241.2 | 67.6% | |
| 5.5% | 4,198 | 9,319 | 169,443 | 306.2 | 85.9% | |
| 6.0% | 5,100 | 10,221 | 170,345 | 372.0 | 104.3% | |
| 6.5% | 6,011 | 11,132 | 171,255 | 438.4 | 122.9% | |
| 7.0% | 6,931 | 12,052 | 172,176 | 505.6 | 141.7% |
I have made the full 36 page report available for all to download here: Sun Trust Banks Simulated Government Stress Test 2009-05-04 13:38:04 1019.01 Kb.
I will follow up with Stress Tests for Goldman Sachs and American Express tomorrow. Stay tuned...
For those who do not know or follow me, I have a strong track record in calling this credit crisis:
- The Commercial Real Estate Implosion: I called it in 2007 - "GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months".
- The Investment Bank Implosions: Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]) - and - Lehman Brothers investment banking/CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008])
- The Mortgage Banking Implosion: I called it in 2004, publicly on the blog in 2007 - Countrywide and Washington Mutual (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide with its peer)
- The Regional Bank Implosion: Spring of 2008 - nearly all of the failed or failing regional banks of significant size (As I see it, these 32 banks and thrifts are in deep doo-doo!)
- The Monoline Implosion: 2007-2008 - MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton) and Ambac (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap and Follow up to the Ambac Analysis), among others including the residential homebuilders and their abuse of off balance sheet JVs - well in advance.
I suggest everybody read up on how we got here. I started taking defensive action in 2004, and implemented my offensive actions 2007 - right around the time this blog was started. Read my blog by blow analysis...
Recommended Reading - The Asset Securitization Crisis:
- Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
- Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
- Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
- The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
- Municipal bond market and the securitization crisis - part I
- Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
- An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
- Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
- More on the banking backdrop, we've never had so many loans!
- As I see it, these 32 banks and thrifts are in deep doo-doo!
- A little more on HELOCs, 2nd lien loans and rose colored glasses
- Will Countywide cause the next shoe to drop?
- Capital, Leverage and Loss in the Banking System
- Doo-Doo bank drill down, part 1 - Wells Fargo
- Doo-Doo Bank 32 drill down: Part 2 - Popular
- Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
- The Anatomy of a Sick Bank!
- Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
- GE: The Uber Bank???
- Sun Trust Forensic Analysis
- Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
- Goldman Sachs Forensic Analysis
- American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
- Part one of three of my opinion of HSBC and the macro factors affecting it
- The Big Bank Bust
- Continued Deterioration in Global Lending, Government Intervention in Free Markets
- The Butterfly is released!
- Global Recession - an economic reality
- The Banking Backdrop for 2009
- Reggie Middleton on the Irish Macro Outlook
Recommended Global Macro Reading from Guest Contributors:
- Debt - Thoughts On A Global Problem (Part 1),
- Banking out of Control (Part 2)
- Global Debt Stats (Part 3)
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Everybody on this blog was explicitly warned about this in regards to Goldman. This weekend, I will go through some the other banks in granular detail, as well
