BofA Tumbles on Suspension of Capital Plan - Analyst Blog

In a major setback to its shareholders, Bank of America Corporation BAC has shelved its enhanced capital deployment activities following the discovery of an accounting error and the subsequent downward revision of its capital ratios. The news hit its investors hard and the stock was down nearly 6.3% on Monday to close at $14.95.

The accounting error was discovered as BofA was preparing its 10-Q quarterly regulatory filing. The miscalculation pertained to the treatment of certain structured notes that the company assumed while acquiring the Merrill Lynch & Co. in 2009. BofA had applied an incorrect adjustment related to calculation of the fair value of certain Merrill Lynch structured notes while determining the capital ratios, which led to overstating of capital ratios. Notably, the company's historical financial performance will not suffer due to this

Further, BofA's capital ratios in the annual stress test were overstated. Consequently, the company informed the Federal Reserve about the same and is now required to re-submit its 2014 capital plan within 30 days.

BofA stated that its revised capital plan will be lower than its suspended 2014 capital plan. As part of the 2014 capital plan, the company had announced $4.0 billion share repurchase authorization. Also, the bank was intending to raise its quarterly dividend by 400% to 5 cents per share.

Additionally, BofA made downward revisions in its regulatory capital ratios. As part of its earnings released on Apr 16, the company had provided preliminary estimated Basel 3 capital ratios. Now, these ratios have been adjusted to reflect the changes following the detection of the accounting error.

The capital ratios, including the estimated Basel 3 Standardized (transitional) common equity tier 1 (CET1) capital ratio, was revised to 11.8%, reflecting a fall of 5 basis points (bps) while the estimated total capital ratio was lowered 21 bps to 14.8%. Also, on a fully phased-in basis, CET1 capital ratio under the Basel 3 Standardized approach decreased 27 bps to 9.0%. Further, CET1 capital ratio under the Basel 3 Advanced approaches declined 29 bps to 9.6%.

Apart from being known as ‘too big to fail,' BofA might now be labeled as ‘too complex to manage.' Detection of the flaw has partly dampened the efforts of management to regain the bank's past glory.

Since the financial crisis and after taking $45 billion in bailout money, BofA undertook several steps to improve efficiency.  Even now, the bank continues to face several litigation issues and investigations for its activities in the pre-crisis period.

Hence, we believe that the road ahead is not an easy one for BofA. Apart from its concerns related to the pre-crisis period, the company faces tough macroeconomic challenges that continue to drag revenue growth.

Currently, BofA carries a Zacks Rank #3 (Hold). Some better-ranked major regional banks include KeyCorp. KEY, The PNC Financial Services Group, Inc. PNC and Wells Fargo & Co. WFC. All of these have a Zacks Rank #2 (Buy).