Analysis: BofA is close to its limit for share issuance

Fri Dec 2, 2011 6:08pm EST

A Bank of America sign is displayed outside a branch in Tucson, Arizona January 21, 2011. REUTERS/Joshua Lott

A Bank of America sign is displayed outside a branch in Tucson, Arizona January 21, 2011.

Credit: Reuters/Joshua Lott

(Reuters) - Bank of America Corp (BAC.N) has issued nearly all the shares authorized by its shareholders, and if the bank needed to sell new stock, it would likely have to seek permission from its investors.

That assent may not be hard to get, but the bank's looming limit for share issuance reflects how much stock it has been forced to sell to shore itself up. Since early 2007, the bank's shares outstanding have increased to 10.1 billion from about 4.5 billion.

Issuing new shares is a hot-button issue because it dilutes the holdings of current shareholders, who have already seen the stock lose more than half its value this year.

Bank of America is authorized to have 11.3 billion shares outstanding. It plans to issue up to 400 million shares in a swap for preferred shares and other securities, under a deal first announced in the bank's quarterly filing in November.

Warren Buffett's Berkshire Hathaway Inc (BRKa.N)(BRKb.N) can purchase up to another 700 million shares through warrants obtained as part of the insurer's $5 billion investment announced in August.

Accounting for those two events, the bank has authorization to issue about another 64 million shares, enough to raise about $364 million at current prices. Many analysts believe the bank has to issue billions of dollars of shares to meet its capital needs.

For example, in a research note last week, Deutsche Bank analyst Matt O'Connor estimated Bank of America will increase its common equity by $15 billion to meet new capital requirements, largely by converting outstanding preferred shares and trust preferred securities. But he noted the bank would need shareholder approval to increase common shares outstanding.

Some analysts say that the bank may not need to issue new shares. Bank of America CEO Brian Moynihan himself has said his bank can earn the money it needs instead of issuing common stock.

The big "pressure points" on the bank that might force it to issue shares are the ultimate cost of its mortgage liabilities and whether regulators will allow banks to meet new requirements over a long enough period of time, said Jason Goldberg, an analyst with Barclays Capital.

BEST INTEREST OF COMPANY?

Bank of America and 30 other large U.S. banks are currently preparing for another round of government stress tests designed to determine whether they have sufficient capital to sustain future economic shocks. Six large U.S. banks with big trading operations, including Bank of America, must also submit to a test of their ability to withstand a European debt crisis.

Bank regulators worldwide are also laying out tougher capital standards that are expected to go fully into effect by the end of 2018.

In the bank's quarterly filing in November, Bank of America eliminated language that said the bank planned to build capital through "non-dilutive capital related initiatives."

"The company continues to focus on building capital and we expect to be in full compliance with the Basel III capital standards within the regulatory timelines," bank spokesman Jerry Dubrowski said.

The bank increased its share count authorization to 11.3 billion from 10 billion in February 2010. The bank needed additional shares to convert 1.286 billion in "common equivalent stock" securities into regular common stock as part of its payback of the Troubled Asset Relief Program.

In a special meeting to approve the authorization, Moynihan, who had become CEO a month earlier, faced multiple questions about the dilution already suffered by shareholders.

"All the shareholders have been diluted as part of this transaction, but it was in the best interest of the company to raise the common equity, so we could get on and start to build the company and the future that we need to build," Moynihan responded.

(Reporting by Rick Rothacker in Charlotte, North Carolina; Editing by Gary Hill)

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Comments (4)
david68 wrote:
same old news. American corporations have become tools for inriching their corrupt executives, through crazy pay and that great american invention called the bonus, while screwing their shareholders. the pay to these too big to fail gangsters should be regulated just like gov’t workers since they are not really a part of the capitalist system

Dec 03, 2011 12:15pm EST  --  Report as abuse
Here’s an idea. When the stress tests are conducted this time lets get actual appraisals of the true current market value of the “assets” Bankrupt in America claims to have in just the foreclosed residential mortgage market in the entire United States.
Naturally the committee will use the most up to date Case-Shiller Index data and since the rest of the people on the street still don’t use Timmy Geithner’s brilliant mark to model scheme to calculate their home values neither should the banksters use this make believe matrix.
By getting truly accurate valuations on the millions of foreclosed, short sale, defaulted, walked away, forebearence hold properties using honest (dare I use that word in reference to these criminals) figures of mark to market model the Committee would soon discover that the real value of these bastards assets would be no where near what the claim.
Then if Wizards of Wall St. failed the so called “stress test” their debt to income ratios would cause them to be down graded by the geniuses at Moody & Poor.
Then the real fun would begin. Reverse stock splits would force the banks to buy back their worthless shares (sorry Warren)then following a dynamic market correction home owners would magically have faster loan modification approval times with no penalties or arrears, principal reductions, lower interest rates to reflect the true market value of their investment portfolio (i.e. their home)
Until that happens all this nonsense is balloon juice.

Dec 03, 2011 1:58pm EST  --  Report as abuse
breezinthru wrote:
I’d like to know how it is possible that B of A has mortgage liabilities problems. The taxpayers absorbed their toxic debt at the beginning of the crisis and Frannie bought more questionable debt about a year ago.

Dec 05, 2011 2:14am EST  --  Report as abuse
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