NEW YORK (TheStreet) -- The Federal Reserve's revised stress-test results look even worse for Bank of America (BAC - Get Report), but Citigroup analyst Keith Horowitz still thinks investors should buy the bank's shares.
The Federal Reserve completed the first part of its two-part annual stress-test process for the nation's largest banks last Thursday when it announced that 29 out of 30 tested banks "passed" the Dodd-Frank Act Stress Tests (DFAST) by showing they could remain well capitalized with minimum Tier 1 common equity ratios of at least 5% through a "severely adverse" economic scenario.
The only bank to fail DFAST was Zions Bancorporation (ZION) of Salt Lake City, with a minimum Tier 1 common equity ratio of just 3.6%, according to the corrected test results released in full by the Fed on Monday. That's a slight improvement from the original 3.5% minimum Tier 1 common ratio the Fed announced last week, but it is still lousy result.
The Federal Reserve on Friday announced the stress-test results would be corrected, "to address inconsistencies in the treatment of the fourth quarter 2013 actual capital actions and assumptions about preferred and employee compensation-related issuance over the course of the planning horizon."Bank of America's minimum Tier 1 common equity ratio through the nine-quarter severely adverse economic scenario was 5.9% according to the corrected stress-test results. That's the lowest among the 29 banks that passed the tests, and a downward revision from the original minimum Tier 1 common equity ratio of 6.0%. The second round of stress tests is called the Comprehensive Capital Analysis and Review (CCAR), and incorporates banks plans to deploy excess capital through dividend increases, share buybacks and/or acquisitions into the same severely adverse scenario. The Fed will announce the results of CCAR Wednesday at 4 p.m. ET, and most of the banks subject to CCAR will be expected to announce their capital deployment plans soon after. Atlantic Equities analyst Richard Staite on Monday downgraded Bank of America to a "neutral" rating form an "overweight" rating, while lowering his first-quarter EPS estimate for Bank of America to 26 cents from 32 cents, lowering significantly his 2014 EPS estimate to $1.33 from $1.48 and cutting his 2015 EPS estimate to $1.68 from $1.80. Staite also cut his price target for Bank of America to $18.50 from $20.00. Staite's downgrade reflected the expected decline in trading revenue among the largest U.S. banks, but also Bank of America's poor showing in the stress tests. Despite the downgrade, Staite still expects the bank "just about be able to carry out a $5bn buyback and pay a $2.5bn dividend although we are somewhat nervous that it or another bank could be failed on a qualitative basis." Horowitz of Citigroup is sticking with his "buy" rating for Bank of America, but on Monday in a note to clients wrote that because of the Fed's revision to the stress-test results, "our capital return estimates look a tad bit too high. The key distinction is that this is our estimates ($5 billion buyback authorization and $0.03 increase in the dividend), since we are not sure what was in their capital plan." Bank of America currently pays a nominal quarterly dividend of a penny a share. The company following the 2013 CCAR was approved for $5 billion in common-share repurchases from the second quarter of 2013 through the first quarter of 2014. "BAC's projected minimum Tier 1 common ratio under the severely adverse scenario fell to 5.9% from 6.0% in the initial release. If we were to reduce the buyback request to the $4.5 billion range, we find BAC would get back slightly above the 5% minimum." Investors won't know until late Wednesday whether or not Bank of America has decided to cut it quite that close in its capital plan submitted to the Fed. But even though Bank of America doesn't have as much of an excess-capital cushion as Horowitz previously estimated, his view of the stock is unchanged, and he wrote that he would see any dip in the shares following Wednesday's announcements as a "buying opportunity." His price target for the shares is $19.00. Bank of America's shares closed at $17.37 Monday and traded for 10.8 times the consensus 2015 earnings estimate of $1.62 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.31. The shares have returned 12% this year, which is a strong performance compared to the 3% return for the KBW Bank Index (I:BKX). The stock returned 34.5% during 2012, following a 110% return during 2011. Bank of America's shares were up slightly in morning trading Tuesday, to $17.38. Follow @PhilipvanDoorn
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