It has been rough going for big bank stocks over the past few
weeks as mixed earnings and economic uncertainty have hit this once
surging sector hard. This trend is especially apparent for
Bank of America (
as the bank has lost over 5% in the past month while it missed
pretty badly in its most recent earnings report, putting up a loss
of five cents a share compared to an estimate of a five cent per
Despite this miss, the company was looking to boost both buybacks
and dividends in order to sweeten the pot a bit for shareholders.
Plus, BAC had recently passed Fed stress tests, and undoubtedly BAC
is looking to get back to being more of an income play again,
though that is obviously still a long ways off.
These plans might be on hold for now though, as BAC just revealed
that it has miscalculated its level of capital following its
purchase of Merrill Lynch in 2009. As a result of this
miscalculation, the firm had to
adjust its capital ratios downward
, while it must also resubmit its capital plans within 30 days.
This also means that BAC's plans to offer up a $4 billion stock
buyback program, as well as its initiative to boost its quarterly
dividend from one cent a share to five cents a share is on hold
until it receives new Fed approval. "Until receiving notice that
the Federal Reserve has not objected to the new capital plan, Bank
of America will not be able to increase its capital distributions,
including those increases approved during the (stress tests)," the
Fed said according to a CNBC article.
Thanks to this new wrinkle of uncertainty, shares of BAC were
sharply lower in Monday morning trading. Shares had fallen by about
5.3% at time of writing, while volume was well above normal, and
was actually in excess of what
was seeing on the day.
The move also continued the trend lower for BAC and the pessimism
trickled into other banking stocks as well. While many of the
larger banks like Citigroup (
) and Wells Fargo (
) were relatively unscathed, smaller banks like Bank of New York
) and PNC (
) were down more than 1% on the day. Still, this was pretty much a
BAC exclusive issue, and given some of the recent earnings
estimates for Bank of America, there may be more trouble ahead for
the stock beyond this problem.
Investors should note that we currently have a Zacks Rank #5
(Strong Sell) on BAC and that we were already looking for
underperformance from this banking giant before this debacle hit
the news wires. The reason for this low rank stems from a flurry of
analyst estimate revisions lower in the past month, as nearly all
of the most recent estimates have been to the downside.
In fact, for the current quarter, 2 estimates have gone higher in
the past 30 days compared to 11 lower, while for the current year
time frame, not a single estimate has moved higher while 19 have
gone lower. This has led to a huge reversal in the current year's
consensus EPS estimate over the past month, as this has moved from
$1.34/share a month ago to the current level just under one dollar
(99 cents) per share.
Clearly, the near term outlook for BAC stock isn't looking that
great, and that is especially true following BAC's capital
miscalculation which added a fresh layer of uncertainty to the
stock. Still, BAC does look to likely pass the stress tests
following the new submission to the Fed as the new data didn't push
their capital ratios down that far.
In fact, the company said that estimated Basel 3 tier 1 capital
ratio was down just five basis points, while the tier 1 capital
ratio was revised down 21 basis points, and the total capital ratio
was revised lower by 21 basis points. These aren't huge moves so
BAC should still be able to pass regulatory hurdles and then
reconsider its buyback and dividend hike once more.
Investors should thus look for BAC to hike dividends and buybacks
in a bit more time, though one cannot say for sure if this is the
end of the issues for Bank of America stock. After all, even if BAC
gets its capital issue sorted out and can hike its dividends,
estimates have been falling like a stone for BAC and more weakness
could definitely be ahead for this banking giant.
But what do you think?
Can BAC turn things around after this embarrassing miscalculation?
Or is more pain ahead for this stock even if it boosts dividends
and does its share buyback program as planned?
Let us know in the comments section below!
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