BAC: Are They Going to Issue Secondary Offering?

There were two times I saw Bank of America hit the $10 level.  And as the world waits in abated breath to the biggest gainer of Dow Jones this year to double their stock price last night, BAC stock dips down contrary to the direction of the S&P.

Some would say its technicals; the stock simply hit their resistance level last night.  But the rumor that BAC will issue a secondary offering continue to persist around the four corners of wall street.  (Does wall street have four corners?  unlikely.  But then again, this is my blog and it has a nice ring to it. )  Going back, like any other investors, I'm beginning to have a seed of doubt regarding this latest rumor.  A rumor that has been bouncing around for many days can affect one's faith in a stock.  So my mind wanders back to its main man, Brian Moynihan.  If I remember it right, last year, when Bank of America has seen its very worst, rumors also abound that it will sell stocks to beef up their capital.  But Brian Moynihan said "no, it won't happen".  So he went back to his desk and worked on his numbers, trying to devise ways to satisfy the Feds while meeting their mortgage obligations.  And he delivered.  Bank of America sold off more than $30 billion of assets last year. He unloaded private equity, credit cards and insurance company assets.  And his divestiture strategy continues this year with Apollo Capital buying the Irish credit card.  They also got an expensive deal with Warren Buffet for a $5 billion preferred shares.

So , it seems that Bank of america will not solve its problems by stock dilution.   Not now when they are enjoying excess capital of a little bit more than $1 per share over Tier 1 ratio and they continue to have a line up of non-core assets to sell.  The continued denial of Brian Moynihan of issuing secondary offering is enough for me.  For now.   

Another Look at the U.S. Banks' Stress-Test

Wall Street has been rejoicing with the results of the stress tests performed by the Feds on major U.S. banks.   The stress test was supposed to test the capital health of the banks and to ensure its resilience in another economic crisis.  Such is a great step for the Feds to ensure that banks are well-capitalized and indirectly , restore confidence in the market.   Only four banks failed the stress test out of 19 and Citigroup is embarrassingly included in this list.

However, I find it odd and dangerous that Wall Street find the passing of the Fed's stress test a reason for many U.S. bank stocks to rally.  The stronger banks are increasing their dividend payouts and buying back their shares in a large scale.

Results of the Stress Test:

1.  JPMorgan -dividend payout to 25 cents a share every quarter and buyback stock worth $15 billion

2.  BB&T  - dividend payout of 16 cents a share 

3.  State Street  - dividend payout of 18 cents a share and buyback share worth of $675 million shares

4.  US Bancorp  -  dividend payout of 50 cents a share and buyback share of 50 million shares

5.  Wells Fargo  - dividend payout of 12 cents and buyback of 200 million shares

6.  American Express and Goldman Sachs - buyback stocks

7.  Morgan Stanley, Capital One -  maintain dividend payout

8. Other banks have no specific plans as of the moment.

Like a parent who molds their child by punishment and reward system, the Feds are pushing banks to turn their backs on consumer lending, exercise much much prudence in commercial lending, avoid real estate and stack up on government securities.  We understand where the Feds are coming from.  They don't want a repeat of the recent economic crisis that caused White House many sleepless nights.  However, there is also such a thing as extreme caution and in this case, extreme regulation.  Banks financials are now swamped with cash and government securities,  loans as percentage of asset is very low and equity over asset is high.   This is not good.  Yes, safe, but not good at all.  Banks are in the business of making money.  And they make money from lending.

No wonder Bank of America remained quiet in the wake of the stress test results.  Among all banks, this is the bank that actually has a reason for rejoicing.  Bank of America stock is the biggest gainer in Dow this year.  But Brian Moynihan knows he has looming problems ahead of him. He has been busy selling several assets, mostly international,  to concentrate on its core businesses and build capital to deal with the massive mortgage losses that continue to hound the bank.   There is also serious issue of how to create profit in the near future.

So what makes this news worse than it already is?  The Feds, acting on the financial regulatory reform bill passed by Congress, would make this stress test an annual thing , in addition to other battery of stress tests that the Feds are preparing for the biggest lenders as we speak.