Several banks that made the painful decision this year to dilute their shareholders by raising more capital did not face major punishment in the stock market.
The positive reaction may prompt more banks to take the same step next year, said Chris Marinac, an analyst at Janney Montgomery Scott who analyzed banks’ 2024 capital raises in a recent research note.
“We think there’s more of these out there,” Marinac said, though he added that some banks will choose to hold off and not join the capital raising activity that picked up after the Nov. 5 election.
The reasons that banks raised capital in 2024 varied. Some did so to fuel loan growth or in connection with a merger, since having more capital can make a deal more palatable to regulators. Other banks raised capital more defensively, with a goal of reducing their concentrations in commercial real estate lending or getting rid of low-yielding bonds they bought years ago.
At most of the banks that raised capital, the stock price subsequently rose, Marinac said. Only nine of the 25 banks that Janney reviewed saw their stocks fall after their move, and even then, most of the declines were 5% or less.
The other 16 banks have seen their stock prices rise by 26% on average, the report found.
The banks whose stocks outperformed include UMB Financial Corporation in Kansas City, Missouri, which raised
“It supports the growth that [Fulton wants] to do,” Marinac said, calling it a “comfort capital raise” that gives them even room to follow up on their expansion plan.
Shares of First Foundation in Dallas rose 46%, a sign that investors are at least somewhat
First Foundation, which earlier plowed cash into low-rate real estate loans, is among the banks that are raising capital to reverse some of their questionable investments in 2020 and 2021. Several others made similar bets by buying large amounts of bonds that paid even less.
Unwinding those purchases early and replacing them with higher-paying investments can be painful, since banks incur losses and take a capital hit. Raising more capital helps neutralize the impact, as does the improved income they get from those newer investments.
“You take a short term hit, but you’re cleaning the decks, and you’re positioning the bank to do better in the future,” said Bert Ely, a bank consultant.
He added: “It’s like pulling off a band-aid off a hairy arm. It stings like hell, but you’ve got to move on.”
One problem is that more capital means more investors — which dilutes existing shareholders’ stakes. But a well-executed plan to improve the bank and rid itself of past mistakes should also bolster its earnings.
“If you’re going to do it, by goodness, you better have a really good reason to do so,” said Jeff Davis, managing director of the advisory firm Mercer Capital’s financial institutions group.
Some reasons may be better than others. Good reasons include funding a compelling acquisition or making more loans after seeing “really phenomenal” activity from clients, Davis said. Swapping out low-yielding bonds for today’s higher-yielding ones is a tougher pill to swallow, he said. One sweetener is a short period — maybe two years — for earning the money back.
Even so, many banks remain hesitant to raise capital and would rather “grow through” their past issues, Davis said.
The Janney analysis reviewed the performance of banks that raised capital starting in late April, when UMB Financial’s deal buoyed other banks’ interest in the transactions. The Janney analysts compared the companies’ stock prices at the time their new capital was issued with the closing prices on Dec. 19.
Banks that saw declines in their stock prices included Cleveland-based KeyCorp, whose stock fell 2% in the months following an investment by the Bank of Nova Scotia. Valley National Bancorp lost 4%, though that’s partly because the
Washington Trust Bancorp’s stock fell the most, with its share price falling 10% after its capital raise in December.