Good news from the government Bank Stress Test

According an article in WSJ, half of the 19 banks may need to increase the equity cushion. But they have 6 months to raise capital to shore up equity.

Banks could increase equity by either raising capital from private investors, or converting the TARP funds they received from government bail out into equity. Obama repeatedly said that he doesn't want the government to get involved in private businesses. So I guess TARP conversion will be the less desirable option.

Because banks have gotten 6 months of probation, by the end of the 6 months, none of the banks may need to raise any new capital at all. If the economy stabilizes, as many early indicators point to, then banks may be able to earn its way out.

Two names that I invested in have fared much better than I expected. Citi group turned out to need only $5B. There is no question that Citi could earn its way of this in next 6 months. Citi's brokerage business must be making a lot of money these days :)

The other bank that I own, Capital One does not even need any new capital, according to WSJ. I thought it would be needing somewhere around $1.5B. It has gotten 3.6B TARP fund from the government last fall. If Capital One ever needs capiatl, it could convert some of the TARP into equity. Obviously that would be dilutive to existing shareholders. Or alternatively, it can wait for 6 months and earn its way out of $1.5B short fall. In first quarter alone, its security portfolio (amounts to 30B if my memory is right) had a gain of $500M. Given how well the capital market, including the credit market, has performed so far, I think it can easily make another $500 in Q2. So even Capital One needs $1.5B, there won't be too much euqity dilution in the end.

Both stocks will go higher.

Disclaimer: I am not a registered financial advisor. My blog is not intended to provide investment advice. Readers beware. Invest at your own benefit or peril!