Bank of America Corp Suspends Stock Buyback, Dividend Increase

Bank of America

Bank of America Corp (NYSE:BAC) said Monday that it would revise its previously announced regulatory capital ratios downward and suspend its share buyback.

The announcement marks a serious blow for the bank that had passed the stress test easily and was permitted to enhance its dividend for the first time since the financial crisis.

Bank of America passed stress test

Last month,the Federal Reserve approved the capital plans of 25 of the 30 financial institutions participating in the Comprehensive Capital Analysis and Review (CCAR).

However, Credit Suisse analysts pointed out that though several banks have released their own stressed capital ratios under severely adverse scenario, the most significant variance from expectations was at Bank of America Corp (NYSE:BAC), where the minimum stressed ratio under the Fed’s scenario of 6.0% compared to the analysts’ estimate of 7.5% (adjusted) and the firm calculation of 8.6%.

As we reported earlier, the poor test results for Bank of America Corp (NYSE:BAC) compared to its peers in the biggest banks puts a cloud on its plans to return capital to shareholders.

Flaws in information submission

In a statement issued Monday, Bank of America Corp (NYSE:BAC) said it would be suspending its share buyback program and a planned increase in its dividend after it discovered flaws in the information it submitted to the Fed as part of the stress test process. The bank attributed the error to an incorrect adjustment related to the treatment of structured notes assumed in its acquisition of Merrill Lynch in 2009.

Due to the error, the company is making the following adjustments to the previously announced estimated preliminary capital ratios for the first quarter ended March 31, 2014: the estimated Basel 3 Standardized transition common equity tier 1 capital ratio was revised to 11.8 percent, down 5 basis points; the estimated tier 1 capital ratio was revised to 11.9 percent, down 21 basis points; the estimated total capital ratio was revised to 14.8 percent, down 21 basis points; and the estimated tier 1 leverage ratio was revised to 7.4 percent, down 12 basis points.

Though the bank had to resubmit its capital plans within 30 days, and correct the errors, the Fed said it could still provide some extension.

Earlier this month, while unveiling its results, Bank of America Corp (NYSE:BAC) indicated it would increase the capital actions it had reported previously. The bank proposed to raise its common stock dividend to five cents per share in the second quarter and planned a new $4 billion common share buyback program.

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About the Author

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports

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