Bank of America
seems to be more than halfway through with its required capital raise, and is hatching a plan to ensure that it has another $13 billion in fresh funds by Nov. 9.
So far, nearly $21 billion of BofA's capital raising has been disclosed, though it's unclear how tax treatment will affect some of those funds. Still, at face value, the sum represents 61% of the $33.9 billion the government said
must raise to withstand the economic downturn if conditions continue to deteriorate.
But few in the banking world expect economic conditions to get quite as bad as the government's
outlined -- with unemployment surging higher and loan losses above Great Depression levels. If they're right, those loads of excess capital could be put to work quite profitably.
At a conference in London Wednesday morning, Bank of America CEO Ken Lewis called the stress test which determined that shortfall "the most aptly named test in history," adding that results showed banks are "strong, well-capitalized and prepared to face even a more dire economic scenario than any of us expect."
"Investors actually seemed relieved at both the results of the test and the fact that banks are beginning to fulfill their capital raising obligations in the private markets," Lewis said in prepared remarks.
To plug in the government-mandated gaps, BofA outlined a plan to raise $17 billion by issuing new stock and converting private preferred holdings to common; $10 billion through asset sales; and $7 billion in earnings.
BofA, the biggest U.S. bank by assets, said Tuesday that it has raised
through an at-the-market public stock offering. China Construction Bank, the second-largest bank in China, confirmed last week that BofA sold about $7.3 billion worth of its holdings in the company to various investors, booking an after-tax gain of $3.5 billion, according to Goldman Sachs analyst Richard Ramsden.
That makes $20.77 billion disclosed so far, with another $13.13 billion to go. BofA reported about $43.3 billion worth of preferred stock held by private investors at March 31, some of which can be converted to boost common equity. The company also plans to sell assets it considers superfluous, like First Republic Bank, and possibly Columbia Management, other businesses and joint ventures.
The company would not comment on capital raising efforts beyond the stock sale and stress test results.
We have not provided how much capital remains to be raised...Similarly we have not discussed a preference for the ways in which we raise capital," spokesman Jerome Dubrowski said in an email.
All of those prospects, combined with the $45 billion in government dollars BofA has received to bolster its balance sheet and spur lending, may set the stage for a strong recovery. On Wednesday morning, Lewis pointed out the "tremendous value" in having a balance sheet big -- and sturdy -- enough to support complex financial transactions.
"Capital is still king," Lewis said Wednesday morning.
Lewis also gave a "hopeful forecast" of continued economic improvement, in contrast to the worst-case predictions of the stress test: "I think the worst is most likely behind us," he said.
Cynics have called such statements overly optimistic, and Lewis acknowledged as much in his speech on Wednesday. But there may be some merit to the hopeful commentary by
CEO Jamie Dimon,
CEO Vikram Pandit,
CEO John Stumpf and
CEO Jeff Immelt, as sentiment begins to shift.
Rochdale Securities analyst Richard Bove, who has been skeptical of the stress tests and bullish on the banking industry he covers, outlined the argument in a report on Wednesday.
"Observers, analysts, the press, government officials, policymakers and interested professionals have all argued that the Depression‐like loan loss view is the correct one," writes Bove. "They have argued this for a year. The problem with their arguments is that to this point, these arguments have not proven to be correct."
Investors have begun to warm to this view, amid glimmers of light in the housing market and other economic indicators. The
Dow Jones Industrial Average
has climbed more than 30% from recent lows in early March, closing above 8,500 a few times recently. Bank stock performance has been even more impressive, with the KBW Bank Index more than doubling since lows around the same time.
For its part, BofA has risen tremendously from a low of $2.53 hit in February, trading above $15 earlier this month. Shares have eased a bit recently, closing down 4% at $11.25 on Tuesday.
Goldman Sachs analyst Richard Ramsden, who rates BofA shares a buy, believes the bank will focus on capital raising efforts that are the least dilutive for common shareholders. He said the stock sale was 16% dilutive, much less than some had feared, and that with the "considerable supply overhang" removed, BofA shares could soar.
BofA now has greater negotiating power in how it raises the remaining $17
billion of equity required under the stress test," Ramsden says in a report Wednesday. He later adds, "As
BofA has raised $5bn more than we expected from the ATM transaction, we believe that its negotiating position vis-à-vis preferred holders and third parties interested in acquiring assets has improved."