Shares of Bank of America Corporation (BAC) rose 3.4% on Tuesday following the news of resubmission of its capital plan. Though this time around BofA has submitted a relatively smaller plan for approval, the development was positive enough to boost investors’ confidence in the stock.
The resubmission followed the suspension of BofA’s 2014 capital plan owing to the discovery of an accounting error on Apr 28. 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 the calculation of the fair value of certain Merrill Lynch structured notes while determining the capital ratios. This led to an overstating of capital ratios, including those submitted for the annual stress test.
Hence, BofA suspended its enhanced capital plan that included a $4 billion worth share repurchase authorization and a 400% dividend hike to 5 cents per share. This was the company’s first enhanced capital deployment plan that was approved by the Fed since the financial crisis.
Apart from BofA, enhanced capital plans of other 24 financial firms including JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC) and Morgan Stanley (MS) were approved. However, five firms – Zions Bancorporation, Citigroup Inc. (C) along with the U.S. units of HSBC Holdings plc, The Royal Bank of Scotland Group plc and Banco Santander, S.A. – failed to win Fed’s consent.
Notably, at present BofA has to wait for the Fed’s approval of its new capital plan which could take around 75 days.
Since the financial crisis and after taking $45 billion in bailout money, BofA undertook several steps to improve efficiency. However, the bank continues to face several litigation issues and investigations for its activities in the pre-crisis period.
Hence, we believe that BofA does not have an easy road ahead.. Apart from its concerns associated with the pre-crisis period, the company faces tough macroeconomic challenges that continue to drag revenue growth. Nevertheless, the resubmission of capital plan and anticipated approval of the same will be able to restore investors’ confidence to some extent.
Currently, BofA carries a Zacks Rank #5 (Strong Sell).
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