BofA Boosts Capital Return

Zacks

Bank of America Corporation (BAC) is boosting shareholders’ value for the first time since the financial crisis. The Federal Reserve has affirmed that it has approved BofA’s capital plan (share repurchases and redemption of preferred shares), submitted under the 2013 Comprehensive Capital Analysis and Review (CCARF) or the stress test.

BofA has announced a $5 billion stock repurchase program. Yet, the expiration date of the program has not been disclosed by the company.

Notably, the company did not ask for any dividend hike while submitting its capital plan to the Fed. Currently, BofA pays 1 cent per share as quarterly dividend. However, prior to the financial crisis, the company used to pay a quarterly dividend of 32 cents.

Moreover, BofA announced the redemption of nearly $5.5 billion worth of preferred stock by May. The company would be redeeming 8.20% non-cumulative preferred stock, Series H, on May 1, while the 8.625% non-cumulative preferred stock, Series 8, will be redeemed on May 28. The notice of redemption for each series is expected to be sent on or around Apr 1.

This is the first time since the financial crisis that BofA’s effort to boost capital return has been approved by the Fed. Earlier in 2011, the company’s plan to hike dividend were thwarted by the Fed, when it denied permission for additional capital deployment. Further, the company did not request for any new capital plan last year.

We are confident that BofA’s efforts to improve capital base and strengthen balance sheet are bearing fruits. Since 2010, the company has been striving hard to improve efficiency by divesting or closing non-core operations and bringing down operating expenses.

Among other 17 banks that were required to submit capital plans to the Fed for approval, only two banks – BB&T Corporation (BBT) and Ally Financial – were denied permission. Further, JPMorgan Chase & Co. (JPM) and The Goldman Sachs Group, Inc. (GS) have been given a conditional approval.

We believe that BofA’s plan to reward shareholders will enhance investors’ confidence in the bank. Further, now that its capital plan is approved, BofA should not get complacent with its capital enhancing initiatives. The company should continue striving for improvement of its balance sheet and capital ratios.

Currently, BofA retains a Zacks Rank #3 (Hold).

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