In March 2013, following last year's the Comprehensive Capital Analysis and Review ("CCAR") process with the Fed, Bank of America (BAC) announced it had permission to buy back stock for the first time since the 2008 financial crisis. Specifically, it had Fed approval to redeem $5.5 billion of preferred shares along with approval to buy back $5 billion of common stock. The bank redeemed the preferred stock in May as part of a broader strategy of managing net interest margin by refinancing high-cost liabilities (with some of the redeemed shares paying over 8% in non-cumulative preferred dividend yield), and also in 2013Q2 repurchased $1 billion of common shares at an average price of $12.6.
With tangible book value per share at $13.3, stock buyback was a good use of capital, and this remains true even at the current stock price of $14.1. CEO Brian Moynihan has commented:
buying back common shares is the best way to continue to drive value for our shareholders
and, indeed, the buyback has taken precedence over raising the dividend, which remains token at 1 cents/share per quarter.
Mr. Moynihan went on to observe "we have more than adequate capital to support our strategic plans" and this appears to be true; at the end of 2013Q2, the bank had top-tier common capital of $126 billion (calculated under the toughest standard of Basel 3 on a fully phased-in basis) representing 9.6% of risk-weighted assets of $1,310 billion (calculated under the same regime). Given the minimum required ratio for 2019 is 9% (being a base minimum of 7.5% plus a systemically important financial institution or SIFI buffer of 1.5%), the present excess capital is over $8 billion.
Furthermore, based on analyst estimates for 2014 EPS of $1.36, BAC will generate additional capital of approximately $15 billion next year. Some of this will need to be retained to support (albeit likely very modest) growth in the balance sheet, some to pay preferred dividends (including $300 million on the $5 billion investment in cumulative preferred shares made by Warren Buffett in August 2011), and some to pay a possibly increased dividend on common stock. However, there will likely be over $10 billion available to repurchase common stock.
This represents a doubling of the $5 billion approved in last year's CCAR process for the period from March 2012 through March 2013, and makes it likely that current tangible book value will represent a floor on the stock price even if there is an adverse litigation outcome (so that BAC's liability exceeds current litigation reserves). Put another way, BAC now generates sufficient capital to absorb all but an extreme adverse litigation outcome so that dilution to present tangible book value is unlikely.
While it is true that near-run upside may be limited by earnings (with the current stock price just over 10x 2014 EPS versus 8.6x for JPM, for example), BAC's ability to buyback a meaningful amount of stock at or close to tangible book value is economically accretive. From an accounting standpoint, it will reduce the share count for 2016 EPS estimates which will be increasingly important to valuation this time next year as analysts begin to roll their estimates forward from 2015.