(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Antony Currie
NEW YORK (Reuters Breakingviews) - Bank of America chief executive Brian Moynihan is taking another step towards shoring up the embattled bank. Offloading around half BofA’s 10-percent stake in China Construction Bank for $8.3 billion is a double boost to capital. Alongside Warren Buffett’s $5 billion stamp of approval last week and the bank’s potential for generating future profits, it should help put BofA back on track. But a quick fix it is not.
Driving the stock down the past few months has been a combination of fears over another recession creating more soured loans and the bank’s seemingly limitless exposure to a plethora of multi-billion-dollar claims from mortgage investors and insurers. Both of these challenges remain fully intact.
BofA is being pummeled with a lot of guesstimates on potential losses, but as a recent investor call proved, there’s a distinct lack of killer questions and analysis from shareholders. This is different from 2008, for example, when the likes of David Einhorn were homing in on the weak spots of Lehman Brothers LEHMQ.PK and other banks with great specificity.
Whatever losses there are won‘t, in any event, come through all at once. And BofA has set aside tens of billions of dollars to cover mortgage claims already, so has a cushion in place. Then there’s BofA’s earnings power. Analysts reckon it should earn $15 billion next year, and more thereafter. Those earnings will boost Tier 1 common equity.
As will selling part of its CCB stake: not only does it add $3.5 billion to the ledger, it also removes more than $7 billion from risk-weighted assets, which bumps the bank’s equity ratio up, too. And while Buffett’s Berkshire Hathaway (BRKa.N) bought preferred shares, which don’t count towards core capital, his imprimatur is a clear confidence booster.
These are all necessary and welcome steps. But it’s a slow road to recovery. While they put the bank on a surer financial footing, shareholders are still left at the mercy of BofA’s legal and economic challenges for some time to come.
-- Bank of America is selling 13.1 billion shares in China Construction Bank. The sale will roughly halve its stake in the Chinese lender to around 5 percent and bring in around $8.3 billion in cash. BofA will register an after-tax profit of around $3.3 billion. The sale will increase BofA’s Tier 1 common equity by some $3.5 billion and reduce risk-weighted assets by $7.3 billion.
Editing by Rob Cox and Emily Plucinak