The much awaited stress test results are out and Bank of America Corporation (BAC) cleared it. In its capital plan submitted with the Federal Reserve, BofA had not requested for any permission for new capital deployment. Currently, the second-largest US bank pays 1 cent per share as quarterly dividend and does not have any share repurchase authorization.
Though BofA has not come out with any official statement regarding the stress test results, the data released by the Fed shows that the company has been able to meet the stringent capital criteria. This confirmed that the company will be able to withstand a bigger financial crisis than it endured in the past.
The Fed had set the Tier I common capital ratio of 5% or above to clear the current stress test. As per the Fed’s data, BofA’s projected Tier I common capital ratio came in at 5.9% under hypothetical economic environment. The hypothetical scenario included unemployment rate of more than 13%, more than 50% decline in equity markets, 21% dip in the housing sector as well as severe economic downturn in Europe and Asia.
Last year, BofA failed to clear the stress test and its plan to return capital to the shareholders was also rejected by the Fed. Hence, the company was asked to boost its capital levels to absorb various mortgage-related losses and meet new capital standards (Basel III). Further, in December 2011, while addressing The Goldman Sachs Group Inc. (GS) investor conference, BofA’s CEO had stated that the company will not seek approval for dividend hike until it is sure of the Fed’s clearance.
Still a Long Way to Go
The clearing of the stress test shows that BofA’s efforts to streamline its balance sheet are now bearing fruit. Since 2010, the company has been striving hard 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 news also enhanced the confidence level of the investors on the company. BofA has come a long way since 2008, when it had to take $45 billion of bail-out money to survive the economic downturn. Through the stress test the company has shown that its capital position has significantly improved from that of 2008.
Now that it has cleared the stress test, BofA should not get complacent with its capital enhancing initiatives. The company should continue striving for improvement of its balance sheet and capital ratios.
Now, we expect BofA to aspire for dividend hike and share repurchase next year, when the company will submit its capital plan for another round of stress test. But, that will completely depend on the overall operating environment and the financial condition of the company that time.
BofA currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
BANK OF AMER CP (BAC): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment