Citi, BofA may need more capital after stress tests

By Elinor Comlay and Dan Wilchins

NEW YORK (Reuters) - Citigroup Inc (C.N) may have to raise more capital after receiving preliminary results of its stress test from U.S. regulators, people familiar with the matter said, while The Wall Street Journal reported Bank of America Corp (BAC.N) may need billions of new capital.

The reports on Tuesday triggered a new round of guesswork and analysis on Wall Street as investors tried to figure out which other banks might face pressure to raise capital. Wells Fargo & Co's (WFC.N) shares fell as much as 5 percent, while Bank of America and Citigroup shares fell as much as 10 percent and 7 percent, respectively.

Bank of America may need to raise as much as $70 billion to maintain an acceptable tangible common equity ratio -- a measure of capital strength -- if unemployment rises, analysts at FBR wrote in a report on Tuesday.

Both Citi and Bank of America posted better-than-expected first-quarter results, but analysts have questioned whether the improvement can last given looming credit losses and the surprisingly high trading profits and one-time gains that boosted the results.

"If you were to ask people last week which banks would most likely have to raise more capital, I think Bank of America, Citigroup would have been the common answer," said Walter Todd, a portfolio manager at Greenwood Capital Associates.

Each bank has received $45 billion of capital injections under the U.S. government's Troubled Asset Relief Program, more than any other major bank.

But both banks are also likely to face substantially more consumer credit losses as U.S. unemployment reaches its highest level in a generation. Bank of America averaged more than $600 billion of consumer loans during the first quarter, while Citigroup averaged more than $500 billion.

These loans will generate interest income, but any interest income may be overwhelmed by credit losses, analysts said, and Citigroup and Bank of America only have small cushions to absorb these losses by one measure.