At the time when many of the large financial institutions are seeking to increase dividends, Bank of America Corporation (BAC) is not in the mood to do so. On Tuesday, while addressing The Goldman Sachs Group Inc. (GS) investor conference, BofA CEO Brian Moynihan stated that the company will not seek approval for dividend hike until it is sure of the Federal Reserve’s clearance.
At present, BofA is paying 1 cent per share as quarterly cash dividend. However, prior to the latest financial crisis, the company used to pay quarterly dividend of 32 cents. Earlier this year, the company was denied permission to increase dividend by the Fed.
Last month, the Fed had announced that 31 banks (with $50 billion or more as assets) will have to endure another round of stress tests in the upcoming weeks to prove their financial strength to confront another recession. Additionally, six big U.S. banks — Citigroup Inc. (C), BofA, JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Goldman and Wells Fargo & Company (WFC) — will have an even higher stumbling block to clear as they have significant exposure to the stressed European countries — Greece, Ireland, Italy, Portugal, and Spain – known as the GIIPS.
The Fed had also stated that only those companies that successfully confirm their core capital to remain above 5% of risk-weighted assets under the stressful scenarios will be given permission to hike dividend. BofA will be submitting its capital plan in January 2012 for the fourth round of stress tests.
Since 2010, BofA has been trying to soar up its capital levels through the sale of its non-core assets and businesses. Furthermore, the company has also begun trimming its workforce in order to lower its operating expenses by $5 billion through the end of 2014.
The chief aim of the stress test is to demonstrate that banks have adequate capital to address potential losses over the next two years under several stressful scenarios. Consequently, passing the stress test is more important to BofA than getting permission for a dividend hike.
If BofA fails the test, it will have to take extra initiatives to raise new capital to meet the requirements. This will obviously not be good for the company as it has been suffering from lower revenues and higher operating expenses.
Currently, BofA retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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