Bank of America Corporation said the Federal Reserve has notified it of the stress test results. The test shows that in order to weather two years of the most severe economic circumstance, Bank of America would need to increase Tier 1 common capital by $33.9 billion.
Bank of America executives emphasized that the test shows that the company is healthy and would continue to be, even under arduous economic conditions.
The Federal Reserve analyzed the financial condition of 19 banks assuming a more prolonged and deeper recession than both private and government economists project. Examiners projected income, expenses, and credit and capital markets losses in a much more severe environment than today. The Fed and the banks then had conversations about those assumptions and projected results before the Fed reached a conclusion on whether each bank needed a larger capital cushion to weather such an adverse economic environment and maintain acceptable capital levels.
Under the stress test results, Bank of America’s total Tier 1 Capital Ratio would remain above the federal regulatory target over the two-year period. Tier 1 common equity would be below the guideline, necessitating an increase in the company’s common equity to meet the government’s most adverse economic scenario.
At March 31, Bank of America’s ratio of Tier 1 common to risk-weighted assets was 4.5%, well above the 4% that the Federal Reserve has targeted in the stress test. Total Tier 1 capital was 10.09%, making the bank “well capitalized” under the regulatory formula. In more normal times, the company targets 8% total Tier 1 capital with at least half in common equity.
Using the most severe economic assumptions, the company’s internal projections for loan losses and income over the next two years differ from the Federal Reserve’s because the agency tended to use standardized loss rates for the 19 banks. Bank of America estimates its particular loss rates will in many cases be less, but in some cases may be higher. The bank has also told the Federal Reserve that it believes the agency’s estimate of income over the next two years is too low.
For example, Bank of America believes its pre-provision net revenue will significantly exceed the government’s estimate in the stress scenario over 2009-2010. The company also believes that the Federal Reserve’s projected non-credit losses over that period are too high.
Price said that the company could increase the Tier 1 common ratio in a number of ways. He said the company intends to sell common stock and/or convert existing privately held preferred stock into common shares. Bank of America has already announced it will sell First Republic Bank and is considering the sale of several other business units including Columbia Management. It may also consider several joint ventures.
In addition to such strategic moves, the company over the next two quarters expects that its performance will exceed projections by the Federal Reserve, which would reduce the amount of Tier 1 common required.
In a related development, Bank of America is seeking to end negotiations and terminate its term sheet with respect to the proposed guarantee of approximately $118 billion in capital markets assets by the U.S. Government. This is an important first step in reducing the government’s support of the company.
D.C.