Updated from 3:04 p.m. EDT
Bank of America
shares opened higher Wednesday, after signs the economy may be improving outweighed reports that regulators were telling the company it needs $34 billion in common equity.
BofA shares closed up 17.1% to $12.69, after payroll processor ADP estimated earlier in the day that there were 492,000 job losses in the private sector in April, well below the expectation for 645,000 and a downwardly revised 708,000 in March.
BofA and other banks stocks reversed steep declines in premarket trading, following the report. The sector had been weighed on by a late Tuesday report in
The New York Times
, citing an executive at the bank, that said regulators completing a
on the company determined it needs $34.9 billion in capital to withstand any worsening of the economy.
Paul Nolte, director of investments at Hinsdale Associates, attributed BofA's turn to positive territory in the premarket to the ADP report.
"If we're looking at a better economy, then maybe the stress test isn't that stressful," he said.
reported that BofA could satisfy regulators' demands simply by converting the government's $45 billion preferred equity stake, acquired through the Troubled Asset Relief Program, into common shares. Doing so, however, would dilute existing common shareholders.
American International Group
made similar moves earlier this year.
BofA has other options to raise capital, including
. The amount it could expect through selling assets or more shares to the public, however, would not cover the amount regulators want it to raise -- leaving a conversion of preferred shares to common stock as the most likely option,
The Wall Street Journal
reports. That could leave the U.S. government as Bank of America's largest shareholder.
Nolte downplayed the significance of converting preferred shares into common stock, calling it "an accounting sleight of hand."
"You're moving it from one end of the balance sheet to another," he says.
Citigroup analysts, in an industry note published Wednesday, say that even with dilution, BofA shares remain attractive. The analysts say
Bank of New York Mellon
are also attractive plays based on valuation, because they will fare best on the stress tests.
BofA is likely to need substantial increase in common, we believe it can cover it via conversion of preferred stock leading to 30% dilution off a $4 core EPS base and stock looks the cheapest in the group," the analysts said in the note.
Regulators began notifying the 19 financial companies subjected to the government tests of the results Tuesday. An official announcement is expected after the stock market closes Thursday.
notes the amount is far higher than published reports had speculated the largest bank might need. The $34 billion figure more than triples previously published reports of Bank of America's capital needs.
The news is certain to increase the pressure on CEO Kenneth Lewis, who was ousted as chairman last week. He remains the company's president and CEO.
Most of the 19 U.S. banks undergoing the stress tests intend to hold press conferences on Friday to explain the test results,
reports, citing a source, and added that many of the banks are in the process of putting together capital recovery plans.
reports Bank of America is considering the sale of an $8 billion stake in
China Construction Bank
within days in a move that would relieve some of the pressure on its balance sheet.
The bank is free to divest about a third of its 16.7% stake in China Construction Bank on Thursday following the expiration of a lock-in period.
The bank was weighing the merits of an immediate sale of the stake against holding on to the stake for a few weeks, the newspaper reports, citing people familiar with the matter. Bank of America said it "intends to remain a long-term shareholder and strategic shareholder with China Construction Bank," the
Joseph Woelfel contributed to this report.
Gannon joined TheStreet.com in March 2007, after spending more than six years as a reporter and editor for The Journal News in Westchester County, N.Y., most recently as an assistant metro editor. He earlier covered several political and government beats as a reporter, including the city of Yonkers. Earlier in his career, he covered venture capital, private equity and the IPO market for Thomson Financial's Venture Capital Journal and advertising for Sales-Fax, a small, independent trade weekly. He earned a B.A. in history from the College of the Holy Cross and an M.S. in journalism from Northwestern University�s Medill School.