Bank of America Achieves a Milestone
Nov 5th 2012 10:28AM
Updated Nov 5th 2012 10:34AM
There's no doubt that Bank of America's (NYS: BAC) CEO Brian Moynihan has been very busy cleaning up the mess that the bank has become over the past few years. It was a happy day when B of A passed the government's stress test earlier this year, though Moynihan didn't dare ask for a dividend increase.
Recently, B of A's Q3 report revealed that the bank's Tier 1 capital ratio under Basel III rules stands at 8.97%, exceeding those of Citigroup (NYS: C) , JPMorgan Chase (NYS: JPM) ,and Wells Fargo (NYS: WFC) . Moynihan immediately proclaimed the bank as being tops among peers in both the capital and liquidity departments.
He may be in the ballpark. The Financial Stability Board just released a new report on additional capital requirements for big banks, and B of A scored one of the lowest surcharges of the 28 listed institutions.
Bank of America can hold less capital than some peers
An updated report by the watchdog of global finances puts Bank of America's common equity holdings at 8.5% of its risk-weighted assets, versus 9.5% for JPMorgan and Citigroup. When the FSB released the list of systemically important institutions last year, it noted that additional capital would be needed -- in addition to Basel III requirements -- without saying how much. This year, the banks on the list were categorized, and the board noted that compliance would entail banks holding 1% to 2.5% extra capital against their assets.
For Wells Fargo, State Street Bank (NYS: STT) , Bank of New York Mellon (NYS: BK) , and Bank of America, the new list is a gift: B of A and BNYM will need to hold an additional 1.5% of capital, while Wells and State Street can get away with a mere 1%. JPMorgan and Citigroup, however, as well as Deutsche Bank (NYS: DB) and HSBC Holdings (NYS: HBC) , must come up with 2.5% more capital.
One Fool's take
Does this mean that Bank of America is stronger than ever? In a word, yes. Moynihan has worked hard over the past two years to tighten things up, dumping non-core assets and paring down the bloat that the bank had acquired over the years. His "Project New BAC," seems to be returning results, as evidenced by the extra 102 basis points his bank's capital cushion is sporting this quarter.
Certainly, the beefed-up capital ratio compares favorably to Wells' 8.02%, JPMorgan's 8.4%, and Citi's 8.6%. In addition, the FSB's ratio seems based upon the reduction of the bank's risk weighted assets, probably because of all the trimming.
But B of A isn't quite out of the woods yet. Some commentators question the rankings, and it's possible that the FSB could change things again next year. Also, Bank of America may face greater liability costs because of sour mortgages written by its Countrywide mortgage unit. Plus, that $5 billion infusion last year by Warren Buffett may have had some impact, possibly by artificially inflating the cash cushion.
But the bank has made real progress, and it's looking like this year will wind up looking better than last, and next year may be even better than that. Could a dividend increase be in B of A's future, perhaps for 2013? It's certainly possible -- and that's something that should make even the most long-suffering investor smile.
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The article Bank of America Achieves a Milestone originally appeared on Fool.com.Fool contributor Amanda Alix has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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