Yesterday's selloff in Bank of America (BAC +1.1%) was likely overdone in light of the bank's capital levels, says Morgan Stanley's Betsy Graseck, suggesting the end result will be BofA scrapping a buyback this year, but reinstating the dividend boost (to $0.05 per share quarterly from $0.01). CLSA's Mike Mayo, on the other hand, says the mistake raises doubt about controls, and reiterates his Sell rating.
Goldman's Richard Ramsden says the bank likely would have failed this year's CCAR (or come very close) based on the new leverage ratios, and notes the lost capital is about equal to the amount of the buyback. At this point, even if BofA passed the CCAR quantitatively, it could fail qualitatively thanks to its accounting processes. Toss in the pending massive litigation settlement with the DOJ (which has come to light post-CCAR).
This will be the first time the Fed has required a bank suspend its capital plan and require a resubmission mid-year, says Ramsden. "In our view this could signal a new level of oversight for banks that wish to continue returning capital when there has been a material change to their risk profile."
Previously: Black eye: BofA suspends buyback, dividend hike