In a major setback to its shareholders,
Bank of America Corporation
) has shelved its enhanced capital deployment activities
following the discovery of an accounting error and the subsequent
downward revision of its capital ratios. The news hit its
investors hard and the stock was down nearly 6.3% on Monday to
close at $14.95.
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The accounting error was discovered as BofA was preparing its
10-Q quarterly regulatory filing. The miscalculation pertained to
the treatment of certain structured notes that the company
assumed while acquiring the Merrill Lynch & Co. in 2009. BofA
had applied an incorrect adjustment related to calculation of the
fair value of certain Merrill Lynch structured notes while
determining the capital ratios, which led to overstating of
capital ratios. Notably, the company's historical financial
performance will not suffer due to this
Further, BofA's capital ratios in the annual stress test were
overstated. Consequently, the company informed the Federal
Reserve about the same and is now required to re-submit its 2014
capital plan within 30 days.
BofA stated that its revised capital plan will be lower than its
suspended 2014 capital plan. As part of the 2014 capital plan,
the company had announced $4.0 billion share repurchase
authorization. Also, the bank was intending to raise its
quarterly dividend by 400% to 5 cents per share.
Additionally, BofA made downward revisions in its regulatory
capital ratios. As part of its earnings released on Apr 16, the
company had provided preliminary estimated Basel 3 capital
ratios. Now, these ratios have been adjusted to reflect the
changes following the detection of the accounting error.
The capital ratios, including the estimated Basel 3 Standardized
(transitional) common equity tier 1 (CET1) capital ratio, was
revised to 11.8%, reflecting a fall of 5 basis points (bps) while
the estimated total capital ratio was lowered 21 bps to 14.8%.
Also, on a fully phased-in basis, CET1 capital ratio under the
Basel 3 Standardized approach decreased 27 bps to 9.0%. Further,
CET1 capital ratio under the Basel 3 Advanced approaches declined
29 bps to 9.6%.
Apart from being known as 'too big to fail,' BofA might now be
labeled as 'too complex to manage.' Detection of the flaw has
partly dampened the efforts of management to regain the bank's
Since the financial crisis and after taking $45 billion in
bailout money, BofA undertook several steps to improve
efficiency. Even now, the bank continues to face several
litigation issues and investigations for its activities in the
Hence, we believe that the road ahead is not an easy one for
BofA. Apart from its concerns related to the pre-crisis period,
the company faces tough macroeconomic challenges that continue to
drag revenue growth.
Currently, BofA carries a Zacks Rank #3 (Hold). Some
better-ranked major regional banks include
The PNC Financial Services Group, Inc.
Wells Fargo & Co.
). All of these have a Zacks Rank #2 (Buy).