Tuesday, April 28, 2009

FBR: Bank Of America Needs $70 Billion

Paul Miller has released a report that none of the programs trading the market currently have obviously read. Regardless, in keeping with hopes that at some point cheerleading and rationality prevail, it is prudent to at least know what will happen as you are purchasing BAC stock today. Miller's conclusion is for a cool $60-$70 billion capital deficiency at BofA if the bank wishes to maintain the 3% TCE ratio it needs to be "viable" and recommends that the company convert $27 billion of private preferreds into common, in line with what Citigroup has done.

From FBR analyst report:
Summary and Recommendation

Media outlets are reporting that the government will require BAC to raise more capital in light of the stress test results that the banks received last Friday. How much capital any particular bank needs is always open for debate and is a very subjective exercise, so we have given investors the tools to decide the amount of capital that BAC needs and what the dilution would be if BAC converted preferred stock to common. FBR believes that BAC will need at least $60 billion to $70 billion to maintain a tangible common equity ratio above 3% at the end of 2010. We are basing our results on FBR's stress test under a 12% unemployment rate scenario. Most major banks will find it very difficult to raise that kind of capital in today's environment, and we believe the first line of defense would be to convert both private and TARP preferred to common equity. FBR encourages BAC to convert the $27 billion of private preferreds as soon as possible, as this will boost the tangible common equity ratio to roughly 4.3% today, reduce the preferred dividend expense, and bring much-needed capital stability to Bank of America. This is consistent with our Underperform rating on BAC and $5 price target, equal to 0.5x tangible book value of $10.88. We expect that the shares will continue to trade at a discount to book until its capital structure is more stable and the risk of dilution is reduced.

Key Points
  • How much capital does BAC need? The Wall Street Journal is reporting that BAC needs additional capital following the results of the government's stress test. Using our 12% unemployment rate scenario from last week's report ("Stress Testing Nine Banks—It's All About Unemployment," April 22, 2009), we estimate that BAC needs at least $60 billion to $70 billion in capital to maintain a TCE ratio above 3% at the end of 2010.

  • FBR stress test vs. Treasury stress test. We must point out that FBR's stress test is somewhat tougher than the government's current stress test with respect to losses, given that FBR projects an unemployment rate of 12% and the government's stress test assumes a 10% unemployment rate. We also note that the government takes a much harder look at off-balance-sheet risk, which could be the wild card in any stress test scenario.

Ken Lewis' future already hangs on a thread ahead of the shareholder meeting tomorrow where many proxy services and investors have repeatedly said they want his head. Intrade shows the price of a June ouster contract for Lewis is getting progressively pricier.

Not surprisingly, the bid/ask spread on Vikram's survival odds is wide enough to fit half of the bank's commercial real estate "assets" through.

hat tip Johnny Bravo Sphere: Related Content
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