On Wednesday, Bank of America Corp. (BAC) announced the completion of its force-placed insurance subsidiary Balboa Insurance Company and affiliated entities to QBE Insurance Group. Going by the terms of the definitive agreement signed in February, BofA sold all insurance liabilities and some other assets of the Balboa business. The company had inherited Balboa from the mortgage lender Countrywide Financial it acquired in 2008.
This transaction is part of BofA’s strategy to shed its non-core assets and focus on managing asset levels efficiently. BofA also looks to concentrate more on businesses that directly serve customers as well as fortify its balance sheet.
As part of the transaction, QBE will maintain long-term distribution agreements with Bank of America for lender-placed insurance, real estate owned programs and some other voluntary consumer insurance products.
Though the financial terms were not disclosed, BofA was expected to receive about $700 million proceeds and additional future payments. This will also benefit BofA’s Tier 1 common capital.
This isn’t BofA’s first attempt to go asset light, vending non-essential businesses. In fact, it remains committed to shed its non-core assets, even after repaying the bailout money it had taken as part of its participation in the Troubled Asset Relief Program.
In 2010, the company took a number of non-core asset shedding actions. Among others, in November, BofA sold 43.6 million of its BlackRock shares for $163 each. The company disposed of most of its stake as it was not vital to its main business. BofA, which held 34% of BlackRock prior to the sale, had obtained its stake as part of its acquisition of Merrill Lynch & Co. in 2009.
Bank of America also sold an additional 2.5 million shares of BlackRock to Japan’s third-biggest bank Mizuho Financial Group Inc.
In July 2010, the company completed the sale of First Republic Bank for $1.86 billion to a group of investors led by Colony Financial Inc. and General Atlantic LCC.
We expect BofA’s non-core asset shedding to continue until it gains confidence with respect to its capital strength. The company’s plan to boost dividend in the second half of 2011 was rejected by the Federal Reserve following the release of second round stress test results in March.
In order to get approval for higher capital deployment, the largest U.S. bank by assets needs to show the Fed even more financial strength, in case it needs to combat another financial crisis. The Fed wants BofA to be at least as strong as its rivals like Wells Fargo & Company (WFC), JPMorgan Chase & Co. (JPM) and U.S. Bancorp (USB) that got the approval to deploy capital. Probably, its strategy to shed non-core assets will help regain its lead status.
Currently, BofA retains a Zacks #4 Rank, which translates into a short-term Sell rating. Also, considering the fundamentals, we are maintaining a long-term Underperform recommendation on the stock.
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