Please consider BofA Mortgage Settlements Magnify Capital Strain as $50 Billion Gap Looms
Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan�s pledge to raise the firm�s dividend as mortgage losses drain funds.Bank of America Daily Chart
Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan�s ability to raise dividends and repurchase shares.
Moynihan, 51, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since succeeding Kenneth D. Lewis last year. As the costs mounted, Bank of America�s stock declined 26 percent this year, the worst showing in the 24-company KBW Bank Index. The company reports second-quarter results tomorrow and has told investors to brace for a loss of as much as $9.1 billion.
Under rules prepared by the Basel Committee on Banking Supervision, Moynihan has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. That�s based on a 7 percent minimum and a 2.5 percent surcharge imposed by regulators on the largest companies whose collapse would pose a threat to the banking system.
Moynihan�s task was complicated after he underestimated how big the capital surcharge would be. The bank counted on 1 percentage point, an assumption based upon �fairly senior information saying that was a reasonable number to use,� Moynihan said in a June 1 conference. The 2.5 percent announced last month means an extra $27 billion burden.
Moynihan has previously had to revise guidance about the bank�s dividend after the Fed rejected what he called a �modest� increase requested for later this year. His deals to settle disputes over defective mortgages, including an $8.5 billion accord last month, means the CEO may have to adjust another promise to investors -- a larger dividend boost by 2013.
In March, Moynihan said that all $42 billion of projected earnings in 2013 and 2014 would be returned to shareholders. Bank of America was �committed� to raising its 1-cent dividend to a higher level equal to 30 percent of earnings, he said.
�We go from being a company which gets its capital in shape in 2011 and 2012 and pays a modest dividend to a company which has significant capital generation from there on out,� Moynihan said at the March 8 conference. The result would be a total of $12 billion in payouts during those two years, he said.
The idea that Bank of America would soon be in a position to raise its dividend was silly when Moynihan proposed it and looks absurd now. Indeed, Bank of America should not have a dividend at all given its huge capital problems.
All the nay-sayers who said the Countrywide Financial takeover would kill Bank of America got it correct.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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