U.S. Bank Stress Test Cheat Sheet

All we’ve heard about this week has been the stress tests, so I figured I would summarize the important aspects for everyone. Hear is what you need to know if you are following the large cap U.S. financial sector.

Capital Ratio Requirements: Banks must have enough capital to maintain the following ratios:

*Tier 1 Capital of 6.0%

*Tangible Common Equity (TCE) of 4.0%

Deadlines: For banks that need more capital, here is their timeline:

*Articulate plan for raising capital by June 8th, 2009

*Implement plan by November 9th 2009

*Maintain target capital ratios through December 2010

Sources of Additional Capital:

The regulators have indicated that raising private capital is the preferred source of raising capital. The banks may also choose to sell certain assets and use cash earnings to reach the targets. If those options are not sufficient to reach the desired capital levels, the banks may convert their TARP preferred capital into mandatory convertible preferred stock, which can be converted, on as needed basis, into common equity in order to boost capital levels to the needed levels.

Here are the results:

As for individual stocks, I have long been writing positively about COF, PNC, and USB on this blog. COF and USB passed and PNC needs to raise the least of all the banks, a meager $600 million. These results are not surprising to me, and I continue to like all three stocks long term.

Full Disclosure: Peridot Capital was long shares of COF, PNC, and USB at the time of writing, but positions may change at any time

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5 Thoughts on “U.S. Bank Stress Test Cheat Sheet

  1. Brian on May 8, 2009 at 1:28 AM said:

    Chad –

    I came across your 3/12 article on Seeking Alpha when looking for information on David Rosenberg after seeing what he had to say today (Check it out on Zero Hedge, that’s where I saw it).

    I was going to email you: did Rosenberg really predict the 666 low on the S&P? Pretty amazing. That was a very good article by you, and quite good on the timing.

    I read your recent posts while stopping by, good stuff; I have to ask if the credit card issues don’t worry you a little bit – I noticed the COF pick. I like safer financials like ICE or CME myself, but I long ago took profits on almost everything.

    -Brian

  2. Chad Brand on May 8, 2009 at 7:56 AM said:

    Well, he was close but he did what a lot of people did and got nervous when the market went into free fall. Rather than jump in at 666, he lowered his number down to 600 (a lot of strategists were using 600) right at the market low. Still, I think it was an interesting indicator because whenever long time bears flip you know the market has to be pretty darn cheap and Rosenberg was not the only one to get less negative earlier in the year.

  3. Chad Brand on May 8, 2009 at 7:59 AM said:

    The credit card issues don’t really worry me, per se, but one must acknowledge that unsecured debt losses will be uglier than secured debt like first mortgages, etc. That said, their funding sources are very strong (great deposits) and they are reserving for huge losses in the card business.

    Something important to point out, the “severe case” in the stress test assumes a 22.5% loss rate on credit card debt. That number is extremely high and even with it, COF is adequately captialized. I think that says a lot in confirming my prior views on the company.

  4. Mike on May 8, 2009 at 10:42 AM said:

    Am I too late? Should I wait for a pull back? You’ve had some great picks recently with cof isrg .. Wish I had listened to you!!!

  5. Chad Brand on May 8, 2009 at 11:09 AM said:

    Thanks, Mike. I am not a momentum guy, so as a contrarian I prefer to sell strength and buy weakness, so yes I would wait for a pullback. That’s just my style.

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