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Investor Concern about MetLife Overblown

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A securities analyst said it is unlikely that the Federal Reserve Board may force MetLife to raise more capital, a concern that has led investors to undervalue the stock.

In a note to investors Thursday, John Nadel of Sterne Agee said the recent underperformance of MetLife’s stock relates to investor concern that the Federal Reserve Board may force it to resubmit the capital plan that failed in March.

Since MetLife would likely fail this stress test again, investors fear this could lead to the worst case scenario: a year’s delay in MetLife’s ability to raise its dividend or buy back stock, or perhaps a requirement to raise more capital.

Nadel said another investor concern deals with the failure of the Federal Deposit Insurance Corporation (FDIC) to act promptly to process MetLife’s application to sell its bank to GE Capital.

“We understand investor caution with respect to potential bad-case outcomes,” Nadel said.

“Clearly, it’s possible the FDIC continues to delay the closing of the sale,” he said.

All that taken into consideration, Nadel said in the note, “we believe the likelihood that the Fed, knowing the bank sale is pending, would require MetLife to raise dilutive capital to meet the minimum risk-based capital and leverage hurdles, is an extremely low probability outcome.”

Nadel explained that the core investor concern is based on a fear that the Fed won’t grant MetLife approval to avoid resubmitting, in which case it appears highly likely MetLife’s resubmission would again fail since even excluding the capital deployment plans, MetLife’s risk-based capital (RBC) and leverage ratios both missed the minimum hurdles in March.

In the note, Nadel explained that the largest shortfall in MetLife’s recent stress test was in the RBC Ratio, which came in at 6% vs. minimum 8%.

This was because of MetLife’s low level of Tier 2 capital compared to its bank peers, not from higher risk.

Nadel said Sterne Agee estimate MetLife could “fill that gap” by retaining 18 to 24 months of earnings, thus seeing the probability of need to raise more capital, thereby diluting equity, “as extremely low.”

Nadel projects that, in the event MetLife had to retain 100% of earnings through 2013 and thus execute zero buybacks and not raise its dividend, Sterne Agee estimate the downside to its projected 2013 earnings per share would be approximately 4.5% while the downside to its 2013 estimated return equity would be about 50 basis points. 

As to the approval of the sale of the bank to GE Capital, “We remain hopeful the sale will show up on the agenda for the FDIC’s July meeting, though that agenda won’t likely be set for at least a few more weeks.”


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