Stress-test sceptics make bank reveal many junk investment

As bank executives flooded the briefcases of Treasury and Federal Reserve investigators with brightly-coloured charts, spreadsheets and long presentations, the authorities’ predictions of losses on anything from credit cards to mortgages fell.

But on one point, the 19 financial groups involved in the tests made little inroads with the officials charged with forecasting the lenders’ capital requirements should the economy worsen in 2009 and 2010: the banks’ own earnings predictions.

In some cases, the discrepancy between the companies’ numbers and the authorities’ findings was marked. Citigroup, for example, told investors its earnings over the next two years could total about $80bn, substantially more than the $49bn forecast by the authorities.

Admittedly, Citi, which will have to add $5.5bn in additional equity after the tests, did not include future writedowns in the forecast – a move that boosted its earnings predictions. But Ned Kelly, its chief financial officer, also complained that the authorities had given the bank “less credit than we would have hoped for . . . expense reductions efforts”.

Bank of America, found to have the biggest capital shortfall at $33.9bn, made similar noises, and even banks that were found not to need any capital, such as JPMorgan Chase, said they would earn more than the authorities think.

Howard Atkins, chief financial officer of Wells Fargo, spoke for many of his colleagues when he decried the government’s view of his bank’s profits.

“The Fed’s results differ considerably from our results,” he said. “We’ve had a 20-year record here at Wells Fargo and if there’s one thing we do know, it’s revenue.”

Scott Siefers, analyst at Sandler O’Neill, said: “If anyone can generate the several billion dollars of excess capital internally, it is Wells Fargo. We may not like the quality of earnings in the next couple of quarters, but it will evidently result in very solid tangible book value creation.”