|Bank of America CEO Brian Moynihan|
NEW YORK ( TheStreet) -- After Bank of America ( BAC - Get Report) reported it may issue new common shares as part of a plan to retire preferred shares and short-term debt, 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.
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. To contact the writer, click here: Philip van Doorn. To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn. To submit a news tip, send an email to: firstname.lastname@example.org.