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

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
• 

Deep Thoughts From Vikram Pandit

Follows the speech that Vik gave yesterday in the London School of Economics. We post this before an in-depth reading, but at first blush is there a hint in there that Vik wants the elimination of mark-to-market?

An amusing snipped from the speech about Citi's purported invaluable role in the current world, aside from having its shares belonging in 99 cent stores.

Our core mission is to enable capital to flow around the world and to stimulate economic growth. In these times, cross-border capital flows from savings-rich economies to savings-short economies are going to be essential to restart global economic growth. There is no question about that. No financial institution in the world is as well positioned to provide these services as Citi. We operate in 109 nations, with more than eight of every 10 employees working in their home countries. Citi is a unique franchise, with an operating model that allows us to be both very local, and very global. [Many others talk about this. We actually do it.]

A Global Financial System for the Next Generation

Publish at Scribd or explore others: Academic Work financial indonesia

Sphere: Related Content

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
• 

Vikram To Fly in Style As Citi Teeters On The Edge

NY Post has broken the news that the bank which is currently suckling on $45 billion of taxpayer money has just completed the purchase of a Dassault Falcon 7x jet for $50 million. We can just smell the Barney Frank hearing on this one. The ultraluxury airplane seats up to 12 very concerned executives, has a plush interior with leather seats, sofas and a customizable entertainment center, and can easily do the NY - London crossing without refueling. When asked about the purchase, Bill McNamee, head of CitiFlight, the subsidiary that manages Citi's corporate fleet said "Why should I help you when what you write will be used to the detriment of our company? What relevance does it have but to hurt my company?"

Just out of curiosity, if Vikram et al really needs a private plane, why not just buy some of the jets that liquidating Lehman is trying to offload, and at much lower prices. As we noted here, Citi could have bought 3 Boeing 737s for less than the cost of one new Falcon. There is no need to even comment on the total lack of common sense of this decision by a management team that despite all signs to the contrary, still believes it is flying high in the golden days of 2005. Sphere: Related Content

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
•