New York: Bank of America Corp, ordered by the government to find $33.9 billion of capital, said on Thursday it planned to sell assets and issue more common stock to cover the shortfall.
The capital-raising, half of which will come from common stock issuance, was announced after the government concluded that the largest US bank faced a potential $136.6 billion of losses from loans, investments and trading in 2009 and 2010 under “more adverse” conditions.
Bank of America said the results overstated the bank’s risks, especially on seemingly safe residential mortgages, and understated its earnings potential, and pledged to repay the $45 billion of government aid it has taken as soon as it can.
“Our game plan is designed to get the government out of our bank as quickly as possible,” chief executive Kenneth Lewis said on a conference call.
Bank of America is one of 19 large US banks that underwent government “stress tests” to see how much capital they need to weather a deep recession.
Ten were told to find capital. Bank of America’s $33.9 billion shortfall is more than twice the $13.7 billion that Wells Fargo & Co, deemed to have the second greatest capital need, was told to raise.
Bank of America’s capital needs add to pressure on Lewis, who called it a “humbling experience” when shareholders last week narrowly voted to oust him as chairman, largely because of its falling share price and a takeover of Merrill Lynch & Co.
The board of directors replaced him with Walter Massey, the president emeritus of Morehouse College in Atlanta. Bank of America said it will seek new directors, perhaps loosening Lewis’ control over a board long supportive of him.
Shares of Bank of America rose $1.21 in after-hours trading to $14.72, after closing up 82 cents at $13.51 in regular trading. They traded at $33.74 before the Merrill merger was announced last 15 September.
Capital raising plans
Bank of America plans to raise $17 billion of common equity, including through converting at less than face value some preferred shares held by private investors. The bank said this could involve issuance of 1.25 billion common shares.
It said it also plans to raise $10 billion from asset sales, including its Columbia asset management unit and First Republic Bank, and may enter into several joint ventures. The bank plans to raise another $7 billion through other means.
Lewis said the Charlotte, North Carolina-based bank wants to remain a strategic partner with China Construction Bank Corp and “always have a substantial ownership position” in the bank. Analysts have said Bank of America could post a $8 billion or larger gain from selling its 16.6% stake.
Asked if he would consider selling any of Merrill Lynch’s investment banking business, Lewis said: “Absolutely not.”
Bank of America also said it plans to get out of a loss-sharing agreement with the government on $118 billion of troubled assets, calling it unnecessary and expensive.
Lewis declined to affirm his goal of repaying $45 billion taken from the Troubled Asset Relief Program as soon as this year, saying that markets have to improve sufficiently for the bank to issue a type of debt required to exit the program.
The ouster of Lewis as chairman could presage his eventual departure from the bank he has worked at for 40 years, including the last eight as chief executive.
Lewis has been attacked for failing in December to back out of the Merrill merger, or tell shareholders about Merrill’s soaring losses. He has said he felt pressure from regulators to complete the takeover. Regulators are examining the bank’s disclosures, and the bank faces many shareholder lawsuits.
Massey declined to say what changes the board will make, except that it will seek new directors with more banking and financial experience. “Our model is not broken,” he said.
Lewis pledged to be responsive to shareholder anger, saying “you reflect on it, and try to see the trends and themes that were being stressed, and react to them.”
He also said, as an aside, on the stress test: “Never has a test been so aptly named.”