November 4, 2011 / 8:47 PM / 9 years ago

UPDATE 2-Bank of America shares fall after stock swap plan

* B of A stock down more than broader market

* Swap reflects poorly on management, analyst says

* Bank says move is economically advantageous

By Rick Rothacker and David Henry

Nov 4 (Reuters) - Bank of America Corp’s plan to issue common stock in exchange for preferred shares rattled its stock price on Friday and underscored how the bank is in a deeper capital hole than its peers, analysts said Friday.

While rivals Wells Fargo & Co and JPMorgan Chase & Co bought back stock in the third quarter, Bank of America said on Thursday it wants to issue up to 400 million new shares to retire preferred shares and other securities.

When Wells made a similar preferred share redemption in September, it used cash.

Bank of America likely does not need to issue stock to meet international capital standards that take effect fully by 2019, said Marty Mosby, an analyst with Guggenheim Partners. But it will probably take two to three years to accumulate the $30 billion it needs, he added.

In the meantime, rivals have won Federal Reserve permission to raise their dividends and to buy back stock. Last spring, the regulator denied Bank of America’s request for a modest dividend increase.

“They have a way to go to build up capital to a point where they can give any back,” Mosby said.

Bank of America said in a filing on Thursday that the stock swap it was exploring was “economically advantageous” because of the lowered market value of the bank’s preferred shares. But issuing new shares would dilute the holdings of existing shareholders.

The move also comes after Chief Executive Officer Brian Moynihan repeatedly said his bank does not need to issue stock to absorb mortgage-related losses tied to its 2008 Countrywide Financial Corp acquisition and to meet capital requirements.

A bank spokesman said the move should be viewed as an even exchange that leaves the company with more common stock, which is more valuable under the new capital rules.

“Over time, this will give us a stronger balance sheet,” spokesman Jerry Dubrowski said.

Bank of America shares fell 6 percent on Friday to $6.49. The decline was deeper than the broader market and the 1.5 percent decline in the KBW Bank Index . Bank of America’s shares are down 51 percent for the year, compared with a 24 percent drop in the bank index.

The proposed stock exchange would increase its Tier 1 common capital ratio, a measure of financial strength, by about 20 basis points to about 8.8 percent, CLSA analyst Mike Mayo wrote in a note to clients.

Bolstering capital is probably necessary given the bank’s unresolved mortgage issues and the fact that peers are stronger, Mayo wrote.

“However, this also reflects poorly on management who were previously adamant that BAC did not need to raise any additional common capital,” he wrote.

The importance of Bank of America’s capital position was highlighted on Friday when G20 Leaders, as expected, named it as one of the 29 global financial institutions that will require an extra capital buffer under rules designed to prevent another worldwide financial meltdown.

In a research note, Fitch Ratings said most U.S. banks on the list will face “limited hardship” from the new buffers, although Bank of America could be “more challenged, given its comparatively larger estimated shortfall.”

Compared with rival Wells Fargo’s repurchase of some similar securities in September, Bank of America’s proposal illustrates how much weaker the Charlotte, North Carolina-based bank is, said Kathleen Shanley, an analyst at Gimme Credit.

To buy back its preferred, Wells Fargo simply paid in cash. Bank of America said it would pay with stock, or maybe bonds — it was not clear.

“Wells Fargo is in a stronger capital position so they have more flexibility to do a transaction in a straightforward way,” said Shanley.

Both banks would require approval of regulators for the repurchases, but Shanley believes Bank of America may only get permission if it pays with common stock, effectively bolstering its capital.

“Bank of America may need to do it in a way that also raises some capital,” Shanley added.

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