Bank of America's $34 Billion - Is That All?

Bank Of America (BAC) has been surging the last few days, up 56% the last 5 days, despite leaked information from the Federal Government Stress Test results. Even though the leaked details of BAC's capital needs seem ludicrously high, the number could have been a lot worse. Analysts have been on BAC's high horse, upgrading the stock, despite the need for $34Billion in capital! And here's why: Despite the fact that $34Billion seems high, you've got to remember this is Wall Street thinking. The same Wall Street thinking that applauded a government move to secure defaults on over $300Billion in debt of Citigroup (C). Both banks have been surging lately as Investors jump back into an industry that was decimated by the credit crunch losses and prolonged recession.

For Bank Of America, and several other banks requiring more capital, the easiest thing to do would be to convert preferred shares into common equity. In BAC's case, doing so would add approximately $28Billion in capital, according to an analyst from Morgan Stanley. The comprehensive analyst report from Morgan's Betsy Graseck details other potential asset sales that would raise the remainder of the required capital. All in all, a situation for BAC that looks much brighter compared to several weeks ago. It was very recently that Goldman Sachs (GS) made a splash by raising $5Billion in a stock offering, in order to use the money to repay the government's TARP funds.

Ken Lewis having his role of Chairman and CEO separated has given shareholders a new life, and recent gains certainly helped cement realistic rebound expectations. All this despite the fact that the financial sector is still on what can be described as slightly thicker ice.

What Investors are still most weary of is government control of the financial sector, and despite the new Administration's repeated denials of Nationalization, the potential of having the US government as the largest shareholder of several major banks will do nothing to quell the argument.

For now though, When the Stress Test results are made public, investors will await word of what exactly Bank Of America will do to raise capital. Till then, what $34Billion?

Disclosure: Author owns C, GS

Comments

[Mad Hedge F...:]

There could be more. Sector delinquencies on securitized loans have jumped from 0.5% last fall to 2.45% in April, the most rapid acceleration in history. Foreclosures are spreading, knocking valuations of properties down as much as 70%, wiping out the equity investors, the mezzanine debt holds, and a good chunk of the primary debt owners. The General Growth Properties (GGWPQ) bankruptcy last month, the largest on record, is further clouding the picture. The firm is trying to bring remote special purpose entities normally immune to these proceedings into the general bankruptcy. If the judge rules in their favor, it will shake the foundations of the whole industry, and send lenders into a long hibernation. Whatever the result, the commercial real estate industry that rises from the ashes years down the road will be unrecognizable. Watch the shares of Bank of America (BAC) and Wells Fargo (WFC), two of the biggest lenders in the sector. Is it any wonder that BAC disclosed today that they need another $35 billion in capital, on top of the $40 billion in TARP money they have already taken, and that WFC needs and additional $15 billion?

May 07 08:52 PM

[barneyrin:]

why did you capittalize nationalization?
or didn't you notice?...
& re other comment
just because you're paranoid doesn't mean they're not out to get you

May 07 10:14 PM

[wcinvest:]

BAC got screwed by the stress tests. At most, JPMorgan is 20 billion in better shape then BAC when you figure BAC has stronger earnings power and less derivative exposure. And less international exposure. The US is closer to recovery then most foreign countries. The government was simply playing a bit too much to market perceptions. BAC's strength has been drastically underrated thanks to Lewis stupidity of asking for too much TARP funds and they could have easily earned their way through this recession and continued to make a profit like they have in 2008 and 2009 so far.

The TARP funds did not count at all in terms of capital so BAC got zero credit for having that regulatory tier 1 capital and ironically was penalized because they had to pay a few billion in dividends on it.

I own a few REIT stocks that I have made money on. The losses in commercial are overblown... Yes, the losses will occur but a huge percentage of them won't translate to the banks balance sheets... Why? Most REIT learned their lessons in the past and they do not have that much leverage so even though commercial real estate as dropped by a great deal in some areas, they are well still very strong. Most banks have much higher standards for commercial loans and typical companies want to pay back their commercial loans since if they don't, they go out of business.

In the case of Office REITs, often the REITs don't even take the full loss when companies cut back and terminate leases and move to a smaller location. When companies break their leases early, the REITs get a nice chunk of change.

A bunch of REITs have already conservatively raised additional capital from additional stock offerings. The stronger REITs have been raising capital in part of make sure they are strong enough to raise private capital and so they can go shopping and buy up weaker players.

There has been and their will continue to be (for a while) a major decline in commercial real estate prices but folks will be surprised when those losses don't translate into banks balance sheets nearly as much as expected.

Shareholders and the companies that own the commercial real estate will take the majority of losses. They will sell some property to other businesses to stay in business.

There are certain subsections like home builders who will continue to default but in as little as 6 months from now, Roubini's predictions for *bank losses* in the commercial sector will be ridiculed.

General Growth Properties is a good example...the losses from that bankruptcy isn't expected to be that much at all on banks balance sheets. And most REITs were much better managed then them and have less leverage.

May 07 10:20 PM

[wholesalecd:]

I'm buying Citigroup now that they ARE in better shape than BAC. The CEO of BAC said two weeks ago that BAC isn't in the same trouble as Citigroup. Well we all now know the truth. He was flat out wrong.

jay boy billy

May 07 11:38 PM

[XRTrader:]

Nice comment wcinvest. And article.

Yes BAC is up 56% in the latest sessions. But, lets keep in mind that this stock was at ~$34 when it acquired Merrill. So, if the sector survives losses and recovers, and Merrills earnings over the long term add to BofAs (and BofA has serious earning potential, even in a scaled down financial universe)....then $34 + a positive value for merrill = more then $34.

All this to say, that from a long term perspective, BofA looks like a good deal. Not to mention their China investments/exposure (~10 billion) and addl emerging market assets.

disclosure: long BAC $40 2011 calls, short BAC $60 2011 calls

May 08 12:46 AM