BofA shares drop after stress-test error halts dividend increase

Company will resubmit proposal after finding botched accounting on structured notes issued by Merrill Lynch

Apr 28, 2014 @ 5:05 pm

Bank of America Corp. stock fell the most since November 2012 after suspending plans for a dividend increase and $4 billion of share repurchases because of an error in its stress-test submission to the Federal Reserve.

Bank of America will resubmit its proposal after finding botched accounting on structured notes issued by Merrill Lynch, the Charlotte, N.C.-based lender said Monday in a statement. The announcement sent the stock down 6.3% to $14.95 Monday after falling as low as $14.86, erasing the company's gain for 2014.

Chief Executive Officer Brian T. Moynihan had been set to boost the quarterly payout to 5 cents a share from 1 cent, five years after the second-largest U.S. lender cut the dividend to a token amount during the financial crisis. Bank of America said its revised proposal probably will mean lower payouts than requested in its existing plan, which was already modified once to win Fed approval.

“Bank of America is by far not the first big bank to make a mistake in its CCAR submission,” David Hilder, an analyst at Drexel Hamilton in New York, said in a phone interview, referring to the Fed's Comprehensive Capital Analysis and Review. He said that while Bank of America noticed the error and probably has sufficient capital to cover the payout, the setback is “embarrassing” for the company.

LEVERAGE RATIO

The stock's drop was overdone and “too punitive” in view of the company's high capital levels, wrote Betsy Graseck, Morgan Stanley's banking analyst, who has a buy recommendation on the shares with a $20 price target. Ms. Graseck said she's assuming Bank of America will eliminate its buyback request while keeping the higher dividend. Mike Mayo at CLSA Ltd., who recommends selling the stock, said the incident “reflects unfavorably on controls” at Bank of America.

The error is another setback for Mr. Moynihan in his effort to increase dividends as shareholders clamor for income amid low yields from other investments. In March 2011, the Fed blocked plans for a boost just months after Mr. Moynihan told investors, “I don't see anything that would stop us.”

The bank's estimated Tier 1 capital ratio was actually 11.9% as of March 31, which is 21 basis points below what the company previously reported, according to Monday's statement. The Tier 1 leverage ratio was 7.4%, or 12 basis points lower. A basis point is 0.01 percentage point.

Bank of America discovered the mistake last week as it prepared its 10-Q quarterly regulatory filing and immediately notified the Fed, said a person with direct knowledge of the process. The error had gone undetected since the firm's acquisition of Merrill Lynch in 2009, said the person, who requested anonymity because the information hasn't been made public.

The bank didn't say when the revised payouts might be announced. The company must resubmit a capital plan within 30 days and undertake a review to ensure no other errors, the Fed said in a separate statement.

Bank of America, led by Mr. Moynihan since 2010, has been working for years to resolve headaches inherited with the purchases under his predecessor of Merrill Lynch and mortgage-lender Countrywide Financial Corp. during the financial crisis. The company reported a $276 million deficit for the three months ended March 31, its fourth quarterly loss under Mr. Moynihan.

Terry Laughlin, Bank of America's former chief risk officer who last week was named president of strategic initiatives, will help manage the resubmission, according to a person with direct knowledge of the process. He'll help establish the scope of what must be resubmitted and will work with Chief Financial Officer Bruce Thompson and Geoffrey Greener, Mr. Laughlin's successor as risk officer.

Bank of America won approval for higher payouts last month even as Citigroup Inc. (C)'s plan was rejected by the Fed, which faulted the quality of the New York-based company's processes. Citigroup was also seeking its first dividend increase since the crisis as well as a stock buyback.

(Bloomberg News)

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