There was nothing completely unexpected hitting stock markets today. It could possibly be said that the main impetus behind today’s lacklustre performance is ‘profit-taking’, with the market perhaps in correction mode after realising that the recent rally was overdone.

In my view, a 10% to 15% correction in the S&P 500 may occur and, to be quite frank, it could be healthy for the market as this would provide a more accurate reflection of underlying fundamentals and give those who have missed out on this rally a chance to get back into the game at better levels.

The market is also a bit cautious about the new flood of capital raisings occurring in the banking sector, with US Bancorp, BB&T Corp and Capital One Financial Corp - three of the nine US banks that did not require additional capital under the stress tests - among the latest banks to announce common stock offerings.

‘They’re trying to get while the getting is good,’ said Walter Todd of Greenwood Capital Associates. ‘Fundamentals of banks appear not as bad they were, but they are still not good given the underlying conditions in the economy.’ [1]

US Bancorp today announced that it would sell $2.5 billion worth of common stock and $1 billion in debt (in the form of five-year senior bonds). It is understood that the bank, which took $6.6 billion from the government’s Troubled Asset Relief Program (TARP), may use the funds to repay state aid.

BB&T Corp slashed its dividend by 68% and said it plans to sell $1.5 billion of common stock in order to repay around $3.1 billon in TARP funds. The bank said it now sees the government aid as being ‘destructive’.

‘We firmly believe this action is in the long-term best interests of our shareholders and our company because of the risk and uncertainty associated with being a TARP participant,’ said Kelly King, chief executive of the regional bank in a statement. [2]

Capital One Financial Corp will also raise capital, around £1.55 billion, by selling 56 million common shares at $27.75 apiece. This is around 2.5% below the current share price of $28.47, which represents a 9.2% fall from its previous close.

Shares in US Bancorp were down by 5.55% to $19.40 while BB&T fell 5% to $25.01.

In the meantime, KeyCorp, a regional bank that under the stress tests required an additional $1.8 billion in capital, announced that it will sell shares. It has emerged that it is planning to sell $750 million worth of common shares and intends to use the proceeds for general corporate purposes. The bank said that because of ‘the challenges presented by the current economic and regulatory environment, we do not expect to increase our quarterly dividend above $0.01 for the foreseeable future and could further reduce or eliminate our common shares dividend.’ [3] Shares in KeyCorp were down by 3.9% to $6.70 so far today.

Elsewhere in the financial sector, Ambac Financial Group surged 21.74% to $1.96 a share after reporting a smaller-than-expected first-quarter loss of $392.2 million from a loss of $1.66 billion a year earlier. The stronger bottom line was attributable to a positive net change in fair value of credit derivatives.

American International Group (AIG) also made the headlines today. According to the Wall Street Journal, the insurer and US government expect the restructuring to take years to achieve. Its share price was 1.5% lower at $1.98.

By around 3.30pm (London time) the Dow Jones Industrial Average was down by 135.96 points (-1.59%) to 8438.69 while the S&P 500 had declined 16.85 points (-1.81%) to 912.38.

It is worth listening out for Federal Reserve Chairman Ben Bernanke’s speech, which is scheduled to take place afterhours. Mr Bernanke is expected to discuss the results of the government’s stress tests on banks.

[1] Source: Reuters News (11 May 2009)
[2] Source: Bloomberg News (11 May 2009)
[3] Source: Bloomberg News (11 May 2009)

By Anthony Grech, Research Analyst, IG Index.

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