Bank of America’s annual examination by the Federal Reserve of the lender’s capital plan was another problematic one.
On Wednesday, the regulator announced it will allow the Charlotte bank to move ahead with its proposal to buy back $4 billion in shares, but the bank must also correct “deficiencies” and “weaknesses” the Fed said it found in the bank’s capital planning process.
It’s a setback for CEO Brian Moynihan, who has worked since the financial crisis to clean up the problems Bank of America inherited from its purchases of Countrywide Financial Corp. and Merrill Lynch. It’s also a disappointment for shareholders who had been hoping for a dividend increase (the bank’s capital plan does not call for raising its 5-cent quarterly common stock dividend).
The Fed’s announcement came as part of its annual review of bank’s capital plans, a process known as the Comprehensive Capital Analysis and Review. CCAR is designed to see whether banks would meet minimum capital ratios and be able to keep operating in another economic crisis. Bank of America met all the minimum ratios. But the Fed said it identified other issues, including in some aspects of the company’s internal controls, that Bank of America must address by September.
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The Fed’s conditional approval surprised some analysts and others. Here’s a look at some of the reaction the news generated:
Jonathan Finger, partner with Finger Interests, which owns Bank of America shares:
“It was disappointing to see B of A receive a conditional approval based on internal controls and risk modeling issues. I think this points to two factors. First, B of A and bank shareholders in general are dealing with a very stringent regulatory environment. Second, I think management and the board bear some responsibility for not focusing sufficient resources on what really is a risk management issue.
Regarding the bank’s capital plan, we would much prefer an increase in dividends over a share buyback that is not accretive to tangible book value per share, and has little effect other than neutralizing the issuance of stock options and nominally boosting reported EPS (earnings per share).”
James Sinegal, bank analyst:
“I was surprised that the capital return wasn’t larger. They have a sufficient amount of capital at this point, but the lack of recurring earnings could be holding them back a bit. That’s an issue that’s come up before.
As far as the issues with loss and revenue modeling, I’m not overly concerned. JP(Morgan Chase & Co.) had a similar conditional approval a couple years ago, and differed significantly from regulators in their modeling this year as well.
I think the biggest surprise, and the biggest problem for Moynihan, was Citigroup’s success. The Fed objected to Citi’s plan last year, but they were the big winner this year while B of A appears to be treading water. That’s clearly bad for Moynihan.”
Joe Morford, bank analyst:
“While the conditional approval was unexpected and disappointing, particularly after management had an independent third-party review its CCAR processes and models last Spring, we are encouraged that the company can proceed with its quarterly buyback plans in 2Q15 while preparing its resubmission. We expect BofA to dedicate the necessary resources to address these issues over the next six months and ultimately have the contingencies to its capital plan removed.”
Marty Mosby, bank analyst:
“We believe that BAC’s conditional improvement is a gentle push for management to remain focused on improving its risk management process and systems. Each year the Federal Reserve taps one of the Large Cap Banks to ensure that all of the management teams remain focused on continuing their further initiatives to improve their underlying risk management expertise. BAC got the added attention this year, but its capital plan was approved so that its repurchase of shares could continue.
This action was much less critical than last year’s all out failure for Citi. We believe BAC’s management should be able to respond productively and enhance its CCAR plan by the September 30th deadline.”
In a note to clients on Thursday, bank analyst Brennen Hawken of UBS Group AG suggested that Bank of America’s expenses could rise as a result the Fed’s findings:
“After BofA's qualified approval, we expect investors may be asking themselves: was that really so bad? After all, this was an approval not a failure and BofA is buying back stock. This is absolutely true but as we have seen at other SIFIs (systemically important financial institutions), the impact of running into regulatory hurdles is often upward pressure on operating expenses, some of which becomes quasi-permanent.”
Out of 31 large U.S.-based bank holding companies whose capital plans the Fed reviewed, Bank of America’s is the only one that received a “conditional non-objection.” Twenty-eight other lenders received complete clearance. Two others had their plans rejected.
Wednesday’s announcement marks the second year in a row that Bank of America has hit a snag with its capital plan. Last year, the bank received Fed approval to raise its dividend and buy back shares. But the buybacks were canceled, and the dividend increase put on hold for months, after the bank later announced it had been miscalculating some of its capital ratios.
The concerns raised by the Fed on Wednesday also come after the regulator in 2011 did not approve of Bank of America’s plan to raise its quarterly common stock dividend, which was 1 cent at that time.
To be sure, Bank of America is not the first bank to receive a conditional non-objection from the Fed.
In 2013, JPMorgan Chase & Co. and Goldman Sachs Group were also given conditional non-objections and told to submit new capital plans later that year to address weaknesses in their capital planning processes.