MetLife has been given approval by federal regulators to sell its bank to GE Capital, a transaction likely to occur early next year.
However, MetLife is not providing any guidance as to when the transaction will occur.
At the same time, MetLife did provide guidance for its 2013 earnings below analysts’ original estimates and added that it expects variable annuity (VA) sales to decline by 40 percent next year, following a 35 percent decline this year.
Sean Dargan, an analyst at Macquarie Capital in New York, calls this a “prudent step in reducing MetLife’s cost of capital.”
Dargan and John Nadel, an analyst at Stern Agee & Leach in New York who first disclosed the news of the approval of the bank sale, agreed that despite the sale, they still expect MetLife to ultimately be designated a systemically significant non-bank (SIFI).
But, that process is likely to take a while. Analysts and others familiar with the SIFI designation process cite the example of American International Group, which was expected to be the first non-bank designated SIFI.
Many expected AIG to be designated as a SIFI at a meeting of the Financial Stability Oversight Council (FSOC) Thursday. It did not happen. The reason for the delay was that the process of designating a bank as a SIFI by the FSOC is complicated and the FSOC and federal staff are moving very deliberately because such a designation is regarded by federal regulators as a “monumental step,” according to someone familiar with the process.
It was the Federal Reserve Board’s concerns about adequate capitalization by MetLife of its guarantees on VAs with living benefits that caused it to fail the Fed’s stress test last year, the beginning of a series of events that led to MetLife’s decision to sell its bank.
The determination that MetLife had not passed its stress test led the Fed to bar the company from increasing its dividend and stock buy backs despite the views of MetLife management that it was adequately capitalized.
The decision by the Office of the Comptroller of the Currency was announced through a securities filing by MetLife.
John Nadel, an analyst at Sterne Agee and Leach in New York said he now expects the deal to sell the bank to GE Capital to close “in relatively short order.”
Nadel added that, “Immediately after, we expect MetLife will file with the Fed to de-register as a bank holding company, a process we understand should take a few weeks.”
Nadel said that as a result, MetLife will officially “de-bank” in the first quarter.
Moreover, “given the approval has been granted, we expect the Fed will exempt MetLife from submitting to the 2013 bank stress test examination.”
In an investor’s note, Nadel said that, “Some investors have argued that the bank sale doesn’t necessarily change things for MetLife—that it doesn’t, by itself, mean that MetLife will be able to begin returning capital to shareholders through buybacks and/or increased dividends.”
Nadel added that, “While formally this argument is probably valid, in our view, the psychological benefit alone of knowing the saga of de-banking is behind the company has real value to longer-term investors, particularly those who have grown more and more frustrated over the last year or more with the seemingly never-ending delays in reaching conclusion on this issue.”
Moreover, Nadel said, “while we expect MetLife will ultimately be designated a non-bank SIFI, we continue to believe the stress-testing process for insurance company SIFIs will recognize the inherent differences between insurers and banks, and thus the outcome is likely to be more favorable.”
Dargan essentially said the same thing in his investor’s note. He said MetLife is pointing to $4.8-$5.8 billion of holding company cash and liquid assets at the end of 2013.
“If the non-bank SIFI standards are at all tailored to an insurer’s balance sheet and if MetLife is judged to have excess capital, we see an upside to our 2013 estimate, which now assumes no share repurchase.”
A $1 billion share repurchase spread throughout the year would add 1 percent to our 2013 estimated earnings, Dargan said.