The Best and Worst Bailed-Out Banks

The bank "stress tests" administered by the Obama administration were controversial even before they were conducted. Critics have complained that the government's worst-case testing is too lenient, the methodology whitewashes the worst problems, and the whole exercise amounts to a phony show of faith in banks that remain deeply troubled.

There are plenty of other stress tests, though—including the one administered in the stock markets every day. So to gauge which of the big bailout recipients seem to be in the best and worst shape, U.S. News ran a kind of poor man's stress test, based on easy-to-understand data that are publicly available.

Our test isn't meant to determine capital ratios or assess the value of so-called toxic assets, which is part of the goal of the government tests. But our assessment captures the way professional investors, crunching all the available data, view the health of banks that have received money from the government's Troubled Assets Relief Program. Our test may also help determine which banks will be able to pay back their TARP loans, once the feds give the OK, and which are likely to lean on the government for months or years to come.

[See the banks most likely to pay back their bailout funds.]

Our analysis focused on the amount of TARP funding banks have gotten relative to their size, and on the banks' market capitalization, also relative to their size. That allowed us to compare each bank's market value—its stock price multiplied by the number of outstanding shares—with the amount of TARP money it has received. [See a detailed methodology.]

If the "market-to-bailout ratio," as we call it, equals 1.0, for example, that means investors driving the stock price up or down have a dim view of the bank's inherent value. "The government injections basically amount to the common stockholders' entire value," says economist James Barth of the nonprofit Milken Institute, which provided some of the data. To pay back the government injections, such banks would probably have to sell assets, which could worsen the situation.

[See the banks least likely to pay back their bailout funds.]

Banks with a market-to-bailout ratio of less than 1 are in even worse shape, since investors are signaling that the banks' value is heavily dependent upon government aid.

The healthiest banks are those with a market-to-bailout ratio well over 2.0. "Investors are saying there's a lot more value there than the government has put in," according to Barth. "These banks are worth a lot more money than that."

So are the banks healthy? Of the 19 biggest banks—those undergoing the government's stress tests—several do appear to be healthy, as the Obama administration claims. Bank of New York Mellon, for instance, has received $3 billion in TARP funding. But its market-to-bailout ratio is 10.3—the highest out of about 50 banks we measured—which reflects the fact that BONY Mellon largely avoided the kind of risky mortgage-backed securities that have caused deep losses at other banks. In other words, if Bank of New York Mellon paid back all $3 billion of its TARP loans today, investors still believe there would be a great deal of value in the company.

[See why the auto bailout is a good model for failing banks.]

Five other stress-test banks—American Express, State Street, Goldman Sachs, JP Morgan Chase, and US Bancorp—all registered a market-to-bailout ratio of 5.0 or higher. They're among the banks most likely to start paying back their TARP loans, once the government allows them to.

Other TARP recipients are clearly struggling. Citigroup—big surprise—scored lowest on our test, with a market-to-bailout ratio of just 0.3. That means investors value Citi at far less than the $50 billion the government has injected in the bank. Fifth Third Bank ($3.4 billion in TARP money) and Regions Financial ($3.5 billion) are next lowest on our list, reflecting concerns not just about big money-center banks but about smaller regional banks as well. And Bank of America, the other staggering goliath, has a market-to-bailout ratio of just 1.1, suggesting investors see little value in the bank beyond the $52.5 billion committed by the government.

[See more companies likely to fail this year.]

All told, six of the stress-test banks had a market-to-bailout ratio of less than 2.0, a poor sign of their ability to pay back TARP loans that amount to nearly $120 billion, combined. Those findings coincide with the early results of the government stress tests and other efforts to analyze the health of the banks. Some analysts, for instance, believe that Citi, Bank of America, and several other banks may need further federal funding—and that outright nationalization is still a possibility.

 [See why some bank profits don’t add up.]

Our findings also highlighted serious problems at regional banks that weren't big enough to qualify for the government stress tests. Of the 18 banks on our list of those least likely to pay back their bailout funds, 11 were midsize regional banks, including South Carolina-based South Financial, Sterling Financial (Washington State), and Webster Financial (Connecticut). That reflects concern that hundreds of smaller banks could be just as fragile as a few of the big banks that have dominated the headlines. One thing is sure: There will be a lot more tests before the banking sector is pronounced healthy.