NEW YORK (
) -- After
Bank of America
reported it may issue new common shares as part of a
, Atlantic Equities analyst Richard Staite late Thursday said the plan would do little to address a "$45 billion capital shortfall at end 2012."
Bank of America said in its third-quarter 10-Q filing with the
Securities and Exchange Commission
that it is considering issuing up to $400 million in new common shares and $3 billion in long-term debt to make private exchanges to retire higher-coupon preferred shares and short-term paper.
Bank of America CEO Brian Moynihan
Staite said in his report that if Bank of America goes through with the plan, it will issue $2.8 billion in common shares, and that "the reduced interest payments would increase earnings by about 2% but result in 4% more shares," and "is therefore 2% dilutive."
The analyst also said the swap "would do little to fill what we estimate will be a $45 billion capital shortfall at end 2012," and that the announcement "further reduces management credibility as it contradicts a recent statement from the CEO that BAC would not issue equity."
Under the Basel III capital requirements, Bank of America will need to achieve a Tier 1 common equity ratio of 9.5% by 2019. The bank has said that its Basel III Tier 1 ratio will range between 6.75% and 7.00% at the end of 2012 and that it will eventually meet the Basel III requirements through retained earnings and asset sales, without issuing more common shares.
The problem, according to Staite, is that "it is increasingly clear that banks may need to reach Basel III much sooner," and that "BAC has no easy options to fill the shortfall." If Bank of America was to issue the new common shares, the company's Basel III Tier 1 ratio will increase by 15 basis points, and Bank of America "would still be $42 billion short of the full requirement."
The analyst still believes that a large common equity raise for Bank of America is "unlikely but this cannot be ruled out entirely." He maintained his neutral rating for the company's shares, with a $7.50 price target, saying that "given the level of uncertainty we expect the shares will remain at a low price to tangible book multiple."
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.