A Cool $200 Billion for Bank of America?

“This is what we’re talking about, a report out of Oppenheimer this morning talking about a slew of the banks, particular Bank of America saying they need to raise $36.6 billion dollars in capital. That’s what they will need in equity to bring its capital ratios in line with their competitors.” Fox Business Network 4/8/2009

Bank of America (BAC) has been talked about quite a bit today and was the most actively traded issue of the day, as the Oppenheimer research note modeled in a large secondary offering into its earnings projections for Bank of America. It’s certainly not common practice for an analyst to speculate like this in their estimates, and BofA is denying the need for a capital raise at this time.

“It is perhaps unusual to model highly dilutive equity raises into earnings forecasts, but we believe that in the current environment, until credit quality stabilizes and capital requirements are more precisely known, it is the prudent thing to do,” analyst Chris Kotowaski wrote.

He expects to see continued deterioration in the loan loss portfolios because of continuing weakness in the credit markets. According to Kotowaski, the company would need to raise more than $36 billion in order to bring their tangible equity capital as a percentage of risk weighted assets in line with the average of more than 25 major banks. BofA has already taken two rounds of government injections totaling $163 billion worth of preferred stock purchases and guarantees for assets. Add in the prospect of another $36.6 billion raise and that would make a nearly $200 billion raised to shore up the failing giant.

This is exactly what Bank of America did not want to deal with right now, as the markets had seemed to turn favorably for the major banks in the last month. There is still quite a bit of risk in Bank of America and Citi (C) among others, as many analysts not just Kotowski, are predicting a very difficult year for commercial real estate and consumer credit such as credit cards. Bank of America could have been down worse on this sort of report, but the market continued to fight its way slightly higher. At the close of trading BAC was only down about 4%, and shares have more than doubled from a month ago.

At Ockham, we believed that these huge commercial banks were Undervalued because it is clear that the government will stand by them and not allow them to fail. However, these banks, including Bank of America, are no longer Undervalued after their hot streak in the last month. We have recently downgraded both BAC and C to Fairly Valued. There is still considerable risk in these companies, even though nationalization is not likely, there could be more pain yet to come in the consumer credit and commercial real estate markets. These commercial banks have a lot of exposure to both of these areas. We are not saying whether BofA will need to raise capital again or not, but we do not see a rapid recovery for them either.

Original post

Comments

[Ockham Rese...:]

Jasonjim,

I am not sure what your grievance is with the article. I do not see what you are talking about, I never made it sound like BofA was asking for a handout. I specifically pointed out the fact that BofA reps deny needing to raise capital. If you have a specific example that irks you, by all means let me know.

Let me assure, neither I nor my firm have a dog in this fight. I simply thought that the Oppenheimer analyst modeling into his analysis a secondary offering, prior to any announcement to that effect, was notable.

We have BAC as Fairly Valued anyway. That does not equate to a short!


On Apr 08 05:44 PM jasonjim wrote:

> Trying to short BAC are you Ockham? Can't see any other purpose for
> this article. The first paragraph even reads like BAC itself is asking
> for $36.6M more bailout money when it is really the opinion of the
> Oppenheimer flunky Kotoski who says they need that money, later denied
> by BAC reps. Organizations like you who use and abuse media privileges
> for your own greedy agendas should be fined by the SEC, or otherwise
> controlled in some effective fashion. All your article does is perpetuate
> the lie started by Oppenheimer. Shame!

Apr 08 06:45 PM

[NewAmerican:]

These so called analyst (who are dime a dozen, in the open market) claiming to know the market and providing us with crooked analysis to serve their company's purpose, should all be jailed and the keys throw away.

I for one don't understand why people give these idiots any credit for their views. They have already damaged the economy.

Apr 08 07:26 PM

[Rigged:]

Its misleading to say that BAC has taken $163B of bail out money in 2 rounds. BAC took $45B. The remaining $118B is a Govt guarantee which BAC paid a premium of a few billions for . The Govt. guarantee is the same as BAC buying a premium for insurance. It does not mean that BAC has received the $118B. If a company paid $5B for $100B of insurance, I would not say that the company has received $100B.

Apr 08 10:06 PM

[whsteffan:]

Scumbag shorts again- trying to manipulate the market. I thought stock market manipulation was illegal. Surely the Democrats will put some of these crooks in jail for once. A little hard time would help some of these jackoffs like Ockham get some religion and start telling the truth instead of pimping for the hedgefund shorters and destroying equity value with coordinated short attacks.

Apr 08 11:36 PM

[cbryant1990:]

I have a specific challenge. Your article should have considered Dick Bovey's opinions to balance the piece.

Apr 09 12:16 AM

[Victhom:]

How do you call this if this is not "Manipulation"???

read both article...same day...by same analyst...

WHERE IS THE SEC????

#1 Garbage.....

Bank of America Needs $36.6 Billion, Oppenheimer Says
By David Mildenberg

April 8 (Bloomberg) -- Bank of America Corp., the largest U.S. bank, needs to raise $36.6 billion in equity to bring capital ratios in line with its peers, according to Oppenheimer & Co.

With investors reluctant to commit new funds to lenders, Bank of America is more likely to raise capital by converting preferred stock to common, or issuing 5.2 billion shares through the Treasury Department’s Capital Assistance Plan, said analyst Chris Kotowski in a report to clients today. Under the Treasury program, Bank of America may issue shares for $6.24 each, the report said.

Bank of America has already accepted two rounds of taxpayer support totaling $163 billion that included preferred stock purchases and asset guarantees. Chief Executive Officer Kenneth Lewis has said the Charlotte, North Carolina-based company will rebound from a fourth-quarter loss without more government assistance.

“It is perhaps unusual to model highly dilutive equity raises into earnings forecasts, but we believe that in the current environment, until credit quality stabilizes and capital requirements are more precisely known, it is the prudent thing to do,” Kotowski wrote.

“We disagree with his assumption,” said Scott Silvestri, a spokesman at Bank of America.


THE THE CORRECTION IN PM......

Bank Earnings Likely to Be Uneven: Analyst
04/08/09 - 12:54 PM EDT

Oppenheimer analyst Chris Kotowski, in an industry note published Wednesday, says he expects further writedowns, charge-offs and loan loss provisioning at the companies. He said the companies should "post something of a recovery" in the first quarter, but results are still likely to be "choppy,"
Kotowski predicts that BofA will need about $7 billion of fresh capital to bring its tangible common equity ratio to 6%, he writes. ????

Apr 09 01:08 AM

[Victhom:]

NOW WHERE IS THE SEC.....???

Apr 09 01:09 AM

[normthefedup:]

I think it's inappropriate for anyone to do THIS much speculating about an entity that is so integral to the financial markets in this country. Especially at a time when the market is so fragile. More facts, less conjecture from all parties will lead to less uncertainty and this mess will end that much quicker. Good piece author, but too big a guessing game for all of us at this time.

Apr 09 09:50 AM

[igggy:]

Of course, the banks will post profits and they won't need more bailout money. Because now with the new rules in place they can value their assets anyway they want. In Japan, 10 years after the real estate bubble, banks were still writing off bad loans. That's where we are heading.

Apr 09 01:33 PM

[DonFurio:]

nice timing on the downgrade, i believe BAC closed at 9.55

Apr 09 05:29 PM

[CJJ:]

The media is now SPECULATION. The market already turned into a gambling hall. The media used to just report the facts on what happened in the gambling hall.

Media before: Joe just lost his blackjack hand when his 19 was beat by the dealers 20 [Disclosure: No positions]
Media now: Joe is going to lose his next hand based solely on, well, nothing. [Disclosure: I win if people talk about Joe losing or if Joe loses, so lets all really root for Joe to lose]

Apr 09 06:06 PM

[truthteller:]

Agreed, according to page 20 of the annual report BAC sold the treasury:
Perpetual Preferred Series N for $15 billion
Perpetual Preferred Series Q for $10 billion
Perpetual Preferred Series R for $20 billion
Total debt incurred from is ~ $45 billion


On Apr 08 10:06 PM Rigged wrote:

> Its misleading to say that BAC has taken $163B of bail out money
> in 2 rounds. BAC took $45B. The remaining $118B is a Govt guarantee
> which BAC paid a premium of a few billions for . The Govt. guarantee
> is the same as BAC buying a premium for insurance. It does not mean
> that BAC has received the $118B. If a company paid $5B for $100B
> of insurance, I would not say that the company has received $100B.

Apr 09 06:40 PM

[truthteller:]

However, you do misrepresent the facts a little.....

You Said:
"Add in the prospect of another $36.6 billion raise and that would make a nearly $200 billion raised to shore up the failing giant."

The Facts:
This simply isn't true. The company has a great many faults, but BAC has accepted $45 billion TARP and paid $4 billion for guarantees thus far. You are speculating on how much the company needs to raise in the future. The truth is we simply do not need to know how much if any BAC needs to raise in the future. You are adding in the government's guarantees for some reason. As I understand the guarantees, these instruments are actually a positive, since they act more like an insurance policy than a debt/preferred stock issue. Also, to my knowledge, other than the $4 billion fee, the treasury does not have to be paid back. Where did I get my facts? Well it's very simple:

According to page 20 of the annual report BAC sold the treasury:
Perpetual Preferred Series N for $15 billion
Perpetual Preferred Series Q for $10 billion
Perpetual Preferred Series R for $20 billion
Total debt incurred is ~ $45 billion

According to page 20 of the annual report BAC had unusually large losses on an asset pool of approximately $118 billion of financial instruments.. As a fee for this arrangement, we expect to issue to the U.S. Treasury and FDIC a total of $4 billion of a new class of preferred stock and to issue warrants to acquire 30.1 million shares of Bank of America common stock.
Total debt incurred is ~ 4 billion

Why don't you stick to the facts and avoid conjecture...

On Apr 08 06:45 PM Ockham Research wrote:

> Jasonjim,
>
> I am not sure what your grievance is with the article. I do not see
> what you are talking about, I never made it sound like BofA was asking
> for a handout. I specifically pointed out the fact that BofA reps
> deny needing to raise capital. If you have a specific example that
> irks you, by all means let me know.
>
> Let me assure, neither I nor my firm have a dog in this fight. I
> simply thought that the Oppenheimer analyst modeling into his analysis
> a secondary offering, prior to any announcement to that effect, was
> notable.
>
> We have BAC as Fairly Valued anyway. That does not equate to a short!
>

Apr 09 07:02 PM

[ifuwish2:]

i do not know how they let people like this write this garbage,,the banks rally and then they try to say all this bad stuff to drive down the stocks,,,what a piece of crap these guys are.

Apr 10 03:12 AM

[NoitAll:]

Believing in the democratic party or any political party is next to believing in Santa Claus or the Easter bunny. Use the parties don't let use you.


On Apr 08 11:36 PM whsteffan wrote:

> Scumbag shorts again- trying to manipulate the market. I thought
> stock market manipulation was illegal. Surely the Democrats will
> put some of these crooks in jail for once. A little hard time would
> help some of these jackoffs like Ockham get some religion and start
> telling the truth instead of pimping for the hedgefund shorters and
> destroying equity value with coordinated short attacks.

Sep 16 10:43 PM