The completion of US banking “stress tests” has unleashed a fee bonanza for Wall Street, with financial institutions set to earn more than $500m in just a few weeks for helping rivals raise equity to plug capital shortfalls and repay federal aid.
Bankers expect a bumper period for equity fund-raisings as many of the 19 lenders involved in the tests tap the market to fill the capital holes uncovered by regulators or pay back funds from the Troubled Asset Relief Programme (Tarp).
The spike in underwriting fees, which touched a record low in the first quarter of 2009, will boost profits of banks’ securities units at a time when they have been hit by the slump in lucrative markets such as securitisations and mergers.
The first three do not need additional capital but said they wanted funds to repay Tarp, while KeyCorp has to add $1.8bn in fresh equity by November following the stress tests.
The stress tests already appear to be helping banks gain access to private capital, a key element in economic recovery, Ben Bernanke, Federal Reserve chairman, said on Monday, according to Reuters. ”The initial indications are encouraging,” he said in a statement.
Banks advising the lenders that have already announced capital-raising deals stand to share around $450m in underwriting fees, according to regulatory filings and people close to the situation.
With a number of smaller banks expected to announce equity raisings in the coming weeks, the current quarter could become the biggest on record for underwriting fees from US banks.
The most lucrative period for US banks advising rivals to raise funds was between April and June last year, according to Dealogic. At the time, more than 20 financial institutions paid out $845m in fees as they rushed to build a capital cushion against the worsening credit crunch.
Some of the fees to be earned in coming weeks will be intra-company transfers as lenders with securities units such as BofA and Wells Fargo, have hired in-house bankers for the fund-raisings.
The wave of new equity raisings pushed the US stock markets lower but bankers said investors showed a new-found appetite for financial companies.
“The success of the capital raisings represents a positive catalyst in a sector and a market that hasn’t had many positive catalysts for quite a while,” said David Erickson, co-head of global equity capital markets at Barclays Capital, which was sole bookrunner on the Capital One deal.