Bloomberg News

Moynihan’s No-New-Capital Stance Draws Scrutiny After BofA Loss

July 19, 2011

July 20 (Bloomberg) -- Brian T. Moynihan, who vowed that Bank of America Corp.’s strength would never be questioned again when he took the top job, found himself bombarded with queries yesterday about whether the bank needs to raise more capital.

The answer is no, Moynihan told analysts during a conference call after reporting an $8.83 billion loss at the bank where he’s chief executive officer. On a day when stock markets rallied and rival Wells Fargo & Co. posted its biggest gain since last year, Bank of America slumped 1.5 percent as falling revenue fed doubt among analysts.

“Nobody believes their theory that they don’t need to raise capital,” said Michael Shemi, a director at Christofferson, Robb & Co., a New York-based firm with $1.4 billion in assets that invests in credit markets. “There’s clearly a credibility gap with management. If you were to listen to their end-of-2010 earnings call, the sentiment was around the dividend and returning money to shareholders. All that’s gone out the window.”

Bank of America slid 15 cents to $9.57 in New York Stock Exchange composite trading, extending its drop this year to 28 percent -- the worst in the 24-company KBW Bank Index. The record loss included $14 billion in costs tied to resolving claims from investors or insurers who said they were duped into buying or backing defective mortgages from the Charlotte, North Carolina-based firm, ranked first among U.S. lenders by assets.

The bank may face more costs tied to bad mortgages as it reimburses investors for loans that went sour and settles state and federal probes. Mike Mayo of Credit Agricole Securities USA asked Moynihan how much “conviction” he has that the bank won’t need to raise capital if it suffers a ratings cut or losses tied to the European debt crisis.

Dividend Dispute

“You were considering the possibility of a dividend increase by the end of the year, and now several investors asked about the idea of a potential capital raise,” Mayo said. “We’ve gone full circle here.”

Moynihan, 51, said the bank reduced reliance on short-term funding and is monitoring risks to its investments.

“The level of conviction is, given the economic scenarios which are moving along, but at a very slow pace, is that we don’t see it,” Moynihan told Mayo.

Chief Financial Officer Bruce Thompson said it’s “not helpful to look backward” at management decisions and that the second-quarter mortgage charges, first disclosed on June 29, presented a new opportunity to guide analysts and investors.

“What we came out with on the 29th was to set people with expectations that we’re comfortable with,” Thompson said in a telephone interview. “We set out some different guidance at that point, and as we wrap up things for the second quarter, we were at the top end of the range that we’d given.”

JPMorgan, Citigroup

Doubt is reflected in the bank’s stock price, which trades at less than half of book value, compared with a price-to-book ratio of 1.2 for Wells Fargo and 0.9 for JPMorgan Chase & Co.

JPMorgan, ranked second by assets, said last week that profit rose 13 percent to $5.43 billion as revenue climbed on gains from underwriting stocks and bonds. Citigroup Inc., the third-biggest, said profit surged 24 percent to $3.34 billion on higher investment-banking fees.

Bank of America told investors in its annual report that, subject to approval by regulators, it intended to raise its dividend in 2011. The payout was cut to a penny a share in 2009 during the depths of the financial crisis. Moynihan said in December 2010, “I don’t see anything that would stop us,” only to have the Federal Reserve block the request. The bank said it would resubmit its plan, then said an increase might be deferred until at least next year.

Basel Rules

Under rules prepared by the Basel Committee on Banking Supervision, Moynihan has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. That’s based on a 7 percent minimum and a 2.5 percent surcharge imposed on the largest companies whose collapse would pose a threat to the banking system. Analysts Richard Staite of Atlantic Equities LLC and Jason Goldberg of Barclays Capital have said it may take $50 billion to close the capital gap.

The bank projects it will have a ratio of 6.75 percent to 7 percent by the beginning of 2013, down from a forecast of 8 percent in April. The company has said it can close the gap through earnings from its operations, including its retail branches, the Merrill Lynch brokerage and the corporate and investment banking units.

“We still don’t have a clear picture of what the earnings power of this company is, and until you get that I think people are still going to sit on the sidelines,” Paul Miller, an analyst with FBR Capital Markets, said in a Bloomberg Television interview. “A lot of analysts are going to lower their ratings.”

Capital Level

Wells Fargo said its Tier 1 common equity ratio under Basel I guidelines stood at 9.16 percent at the end of June, up from 7.61 percent in the year earlier period. The lender estimated that the ratio under Basel III rules would be 7.3 percent at the end of June, according to the bank’s statement.

“We’re growing capital very quickly now,” Wells Fargo CEO John Stumpf said on his bank’s conference call yesterday. “I don’t worry about us getting to whatever our number will be.”

Moynihan said in late 2009, after he was named CEO, that his goals included making sure the bank would never again need government help after taking $45 billion in federal bailout funds. He called that task a “solemn duty” in an essay published in 2010 in the Charlotte Observer. The bank’s earnings statement yesterday said the company is “creating a fortress balance sheet.”

Countrywide Fallout

While his predecessor, Kenneth D. Lewis, arranged to pay back the U.S. during his final days in office, Moynihan was left with the fallout of Lewis’s takeovers, including the 2008 purchase of Countrywide Financial Corp. That deal saddled the bank with claims and costs for defective home loans of more than $30 billion on Moynihan’s watch. He also had to write down the value of MBNA Corp., the credit-card issuer Lewis bought.

Bank of America was guided by decision-making that was a “disgrace,” said Charles Munger, the vice chairman of Warren Buffett’s Berkshire Hathaway Inc., in a July 1 conference. Berkshire has sold its stake in Bank of America and is the largest investor in rival Wells Fargo which, according to Munger, did a better job than most big banks of “avoiding the common stupidities.” The San Francisco-based firm said yesterday quarterly profit climbed 29 percent to $3.95 billion.

‘Very Focused’

Bank of America plans to scale back private-equity investments and run off a loan portfolio and may sell mortgage- servicing rights as part of a plan to reduce so-called risk- weighted assets monitored by regulators. The company projects it will lower the holdings by as much as $250 billion to achieve its goal of $1.8 trillion in the assets by the end of 2012.

“We’re very focused on looking out and moving MSR assets through sale in those instances where it makes sense,” Thompson said on the conference call yesterday. “You can expect to see us continue to reduce assets in the way that we’ve done over the course of the last six quarters.”

Moynihan has sold an insurance business and an investment in BlackRock Inc. since becoming CEO early last year. The bank is weighing the sale of at least part of its $21 billion stake in China Construction Bank Corp., three people briefed on the plans said last month. The sale would simultaneously raise cash and reduce assets that are penalized under the capital rules.

The bank said it has about $16.7 billion at risk in Greece, Ireland, Italy, Portugal and Spain, compared with about $16.9 billion at the end of the first quarter. The figure excludes about $1.7 billion in credit-default protection bought by the bank, the company said in a supplemental statement.

“We were very active and early in getting after this exposure, starting in the first quarter of 2010,” Thompson said. “We feel very good about where the exposure is.”

--With assistance from Andrew Frye and Brooke Sutherland in New York. Editors: Rick Green, Dan Kraut

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.


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