Capital requirement provisions under the Dodd-Frank Act are finally catching up with the banks. Starting next year, trust preferred securities (“TruPS”) will no longer be eligible for calculation in the regulatory capital ratios. Hence, banks have begun to gradually redeem these securities.
Recently, Bank of America Corporation BAC announced the redemption of $2 billion of TruPS that became part of the company’s balance sheet following the acquisition of Merrill Lynch in 2009. The securities to be redeemed are Merrill Lynch Preferred Capital Trust III, Merrill Lynch Preferred Capital Trust IV and Merrill Lynch Preferred Capital Trust V.
These securities, paying holders interest in a range of 7–7.28%, will be redeemed on Jan 29, 2016. TruPS will be redeemed at par value plus “accumulated and unpaid distributions on the trust preferred securities through the redemption date.”
Owing to the acquisition of Merrill Lynch, BofA had noted “a discount to par value purchase accounting adjustments” pertaining to these TruPS. Now, as a result of redemption, the company will incur a non-cash reduction in net interest income as well as pre-tax income of roughly $600 million in the fourth quarter of 2015.
Additionally, BofA projects “to realize cash savings from lower funding costs” following the redemption of TruPS. The company is scheduled to report fourth-quarter results on Jan 19.
Moreover, earlier this month, at an investor conference, BofA and Citigroup Inc. C had projected bleak trading revenues for the fourth quarter (read more: Citigroup, BofA Anticipate Q4 Trading Revenues to Plunge).
Therefore, we believe overall revenues for BofA will trend lower. Despite a rise in rates by the Fed, the company does not expect to see a significant improvement in interest income in the near term. Till that time, non-interest income as well as declining operating expenses will likely support the company’s bottom line.
Currently, BofA carries a Zacks Rank #4 (Sell). Better-ranked finance stocks are The Charles Schwab Corporation SCHW and TD Ameritrade Holding Corporation AMTD. Both stocks hold a Zacks Rank #2 (Buy).
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