BofA Buyback, Dividend Hike On Hold After Accounting Error Draws Fed’s Ire

  • What is an accounting error for BofA points to employment opportunity for accounting and finance majors. If you grow your understanding of the Basel 3 capital requirements, and document that on your resume and LinkedIn profiles, I imagine you would see an incremental increase in interest from prospective employers. I cover capital requirements in Chapter 10 of my Financial Institutions book. I have not been asked to teach Financial Institutions here yet, but when I do teach that course again, rest assured we will cover Basel 3 to boost your understanding and resumes.

BofA Buyback, Dividend Hike On Hold After Accounting Error Draws Fed’s Ire

Bank of America BAC -6.14% took something of a victory lap last month after winning Federal Reserve approval to up its dividend and share repurchase plan, but that lap was derailed Monday morning.

The Fed is requiring BofA to resubmit its capital plan, after the bank announced an accounting error that led it to overstate its regulatory capital levels and ratios. The error, tied to the treatment of structured notes the bank acquired when it bought Merrill Lynch in 2009, caused the bank to announce incorrect capital ratios in its first quarter earnings report.

BofA now says its Basel 3 common equity tier 1 capital ratio was 11.8%, down 5 basis points from its prior estimate; its tier 1 capital ratio was 11.9%, down 21 basis points; its total capital ratio was 14.8%, down 21 basis points; and its tier 1 leverage ratio was revised to 7.4%, down 12 basis points.

Now, with the Fed demanding the bank resubmit its entry for the 2014 Comprehensive Capital Analysis and Review (CCAR), BofA will have to put its capital return plans on hold. That means the bank is suspending its $4 billion stock buyback and intended increase of its quarterly dividend to 5 cents per share, from a penny.

Nomura analyst Steven Chubak maintained his buy rating on BofA’s shares, but cut his price target by a dollar to $18.00. “[T]his outcome is clearly disappointing,” he writes, noting that the bank’s revised capital plan will be revised lower and call for less cash to be sent investors’ way this year. Chubak also warned that if the bank fails to win approval for its buyback with its resubmission there would be additional downside to the stock.

BofA has 30 days to rectify the blunder and resubmit its capital plan, but the stock was dealt a blow Monday morning with a 4.4% decline. The bank had appeared to be turning a corner, winning approval to send more cash to shareholders and sealing a $9.3 billion settlement tied to mortgage issues with the Federal Housing Finance Agency, representing Fannie Mae and Freddie Mac .

With the first of those achievements dashed thanks to its erroneous calculations, the bank is now lumped in with rival Citigroup C -1.01% among banks that have drawn the Fed’s ire. The latter saw its capital plan rejected in March, with the Fed citing concerns about deficiencies in its capital planning process.

The woes of Citi — which is also dealing with the fraud in its Mexican unit — and BofA are sure to prompt a fresh round of questions about whether the biggest U.S. banks are simply to big and complex to be effectively managed. Announcements like that from BofA Monday morning just add to the ammunition for those making such arguments.

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