(Bloomberg News) Bank of America Corp. may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan's pledge to raise the firm's dividend as mortgage losses drain funds.
Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan's ability to raise dividends and repurchase shares.
"They are likely to be in capital-building mode for longer than previously anticipated," Jason Goldberg, a Barclays Capital analyst, said in an interview. For now, he said, "I'm hard-pressed to see meaningful capital redeployment."
Moynihan, 51, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since succeeding Kenneth D. Lewis last year. As the costs mounted, Bank of America's stock declined 26 percent this year, the worst showing in the 24-company KBW Bank Index. The company reports second-quarter results tomorrow and has told investors to brace for a loss of as much as $9.1 billion.
"The charges have had the effect of reducing mortgage uncertainty but have pushed dividend increases further into the future," Richard Staite, an analyst with Atlantic Equities LLC, said in a June 30 note. Staite and Goldberg both estimate that Bank of America needs to raise $50 billion to comply with the new capital requirements, designed to build a buffer against losses and avert a repeat of the 2008 financial crisis.
Basel Rules
Under rules prepared by the Basel Committee on Banking Supervision, Moynihan has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. That's based on a 7 percent minimum and a 2.5 percent surcharge imposed by regulators on the largest companies whose collapse would pose a threat to the banking system.
Moynihan's task was complicated after he underestimated how big the capital surcharge would be. The bank counted on 1 percentage point, an assumption based upon "fairly senior information saying that was a reasonable number to use," Moynihan said in a June 1 conference. The 2.5 percent announced last month means an extra $27 billion burden.
Gradual Increase
"It's phased in over time, so there's time to meet the requirement," said Jerry Dubrowski, a Bank of America spokesman. "On the dividend, we know we have some work to do relative to the capital plan, and when we complete that work we'll resubmit it to the Federal Reserve."