Bank of America Corp., the lender that got a $5 billion boost from Warren Buffett last year, now has the “top capital” among peers and is capable of paying a bigger dividend, said Chief Executive Officer Brian T. Moynihan.
The bank has fulfilled a goal Moynihan drilled into subordinates since his first day on the job: building a “fortress balance sheet,” he said in an Oct. 17 staff meeting at the company’s Charlotte, North Carolina headquarters.
“We’re going to officially declare victory on one of those operating principles,” Moynihan said in the town-hall style meeting. “The reason why is, we have the top capital in the industry, the top liquidity in the industry.” People have stopped asking if the bank needs more funds to absorb losses and now want to know when investors will get the excess, he said.
His display of confidence is a turnaround from last year, when investor concerns about the bank’s health spurred Buffett’s Berkshire Hathaway Inc. to offer a $5 billion injection, just as it had done for Goldman Sachs Group Inc. during the financial crisis. Bank of America went from trailing peers to having the industry’s best balance sheet, Moynihan said last week.
Unlike last year, the CEO avoided saying the dividend would increase, telling staff that he won’t “get ahead” of the Federal Reserve’s 2013 approval process. Moynihan, 53, was criticized in 2011 for implying the dividend would rise, only to have the central bank reject his request. The company passed this year’s Fed stress test by leaving payouts unchanged.
Future Costs
Moynihan’s remarks about capital could be premature if costs from defective mortgages and litigation are worse than expected, said Paul Miller, an FBR Capital Markets analyst who has a hold rating on Bank of America shares. Faulty home loans and foreclosures have cost the lender more than $40 billion since the start of 2007, data compiled by Bloomberg show.
“They still have a lot of liabilities, and it’s going to put pressure on their capital base if these lawsuits go the other way,” Miller said. “What he has done is shrunk the balance sheet more than generated a lot of capital.”
Capital may be no better than at other large banks, according to a Barclays Plc research note last week. To arrive at an estimate of an 8.97 percent Tier 1 common ratio in the third quarter, Bank of America assumed regulators would approve how the firm measures its risk-weighted assets, wrote Brian Monteleone, a Barclays credit analyst.
Capital Ratio
That assumption added 0.4 to 1 percentage point to the capital ratio, and removing it would “pull Bank of America back into the pack of peers’ disclosed ratios,” Monteleone wrote. Goldman Sachs and JPMorgan Chase & Co. have ratios of about 8.5 percent without the assumption Bank of America makes, he wrote. Morgan Stanley’s exceeded 9 percent, Chief Financial Officer Ruth Porat said Oct. 18, a day after Moynihan’s staff meeting.
Bank of America’s capital has improved quickly, making the chances for a dividend increase or stock repurchases in 2013 “much better,” Ed Najarian, an analyst at International Strategy & Investment Group Inc., wrote last week in a note. Larry DiRita, a spokesman for the lender, declined to comment.
Bank of America climbed 72 percent this year to $9.55 a share through yesterday, the best performance in the Dow Jones Industrial Average.
The meeting gave Moynihan an opportunity to demonstrate how his firm is recovering after buying Merrill Lynch & Co. and Countrywide Financial Corp. during the financial crisis. The 1- cent quarterly dividend, smaller than JPMorgan and Wells Fargo & Co.’s, is a vestige of the duress Bank of America faced when it took $45 billion in U.S. bailouts, which the company repaid in 2009.
Dividend Increases
Boosting the payout “will be on the table” after the next Fed stress tests in March, Moynihan said. Regulators judge banks’ progress under tougher international capital guidelines before allowing them to take actions including dividend increases. The world’s biggest lenders must reach Tier 1 capital levels of at least 9 percent by 2019 under Basel Committee on Banking Supervision rules.
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