Bank of America Shares Surge Ahead of Stress Test Results
Shares of Bank of America Corp. continued their rapid climb Thursday, hours ahead of the expected announcement of bank stress test results and following a pair of analyst upgrades.
Bank of America shares jumped $1.57, or 12.4 percent, to $14.26 in morning trading, after gaining 17 percent on Wednesday. Shares have gained 46 percent since the end of last week.
Morgan Stanley analyst Betsy Graseck raised her rating on the Charlotte, N.C.-based bank to “Overweight” from “Underweight” and lifted her price target to $25 from $16.
Separately, Robert W. Baird & Co. analyst David George upgraded the stock to “Outperform” from “Neutral” and doubled his price target to $18.
Both upgrades come amid reports that Bank of America will need about $34 billion to cover potential capital shortfalls based on the results of the government’s stress tests on 19 banks. That sum is not as much as many observers expected, and it is widely believed that Bank of America can raise it.
“Capital needs are significantly lower than the bears’ expectations,” Graseck wrote in a research note.
The results of the stress tests are due out Thursday after the market closes.
The stress tests are being used to determine how banks would fare if economic conditions worsen. Any banks that are deemed to need more capital based on potential future losses will be required to address the capital situation immediately, to ensure they have the necessary protection in place. Nearly all banks are facing mounting loan losses as more customers fall behind on repaying their debt amid the ongoing recession.
Banks will have an opportunity to raise the funds on their own before the government steps in to help support them.
George noted that Bank of America could convert private preferred shares to common stock or sell some of its assets such as Columbia Management or its stake in China Construction Bank.
Morgan Stanley’s Graseck said she expects Bank of America would move to convert private preferred shares to common stock. That would add about $28 billion to Bank of America’s capital base, providing it with most of the money it would likely need.
The remainder could come from asset sales, Graseck said. Selling a stake in China Construction Bank could result in an after-tax gain of $4.1 billion for Bank of America. It could potentially gain up to $2 billion from a sale of Columbia Management, as much as $1.1 billion from a sale of First Republic Bank and $1.8 billion from a stake in BlackRock Inc.
First Republic, a private bank and wealth management firm, and the stake in investment manager BlackRock were acquired by Bank of America when it completed its purchase of Merrill Lynch & Co. at the start of this year.
If Bank of America cannot add to its capital cushion through asset sales or conversion of private preferred shares, it could convert into common stock a portion of a $45 billion investment it received from the government as part of the Troubled Asset Relief Program.
Such a conversion would dilute value for existing shareholders. But Baird’s George wrote in a research note that any dilution seems to be manageable.
Currently, the government holds preferred shares in Bank of America for its $45 billion investment. Preferred shares are essentially a loan that pays out a hefty dividend. By converting that investment to common stock, it would expand Bank of America’s equity base to help lessen the blow if loan losses continue to pile up amid the ongoing recession. Bank of America would also see the dividend payments to the government eliminated, freeing up more cash to cover potential losses.
At the same time, a conversion to common stock would leave the government as one of Bank of America’s largest shareholders, a move that might not be welcome by investors or the board of directors.
Baird’s George said the risk of government ownership potential is low.
5/7/2009 11:23 AM STEPHEN BERNARD AP Business Writer NEW YORK
