(Bloomberg News) Bank of America Corp. gained the most in four months of New York trading as analysts from Wells Fargo & Co., Citigroup Inc. and Nomura Holdings Inc. wrote that the biggest U.S. lender probably won't need to raise capital.
The bank rose 40 cents, or 4.1 percent, to $9.97 at 2:40 p.m. in New York Stock Exchange composite trading. Bank of America had dropped 28 percent this year before today as costs from defective mortgages sapped capital and investors became concerned that the Charlotte, North Carolina-based firm would need to sell stock to conform to new international rules.
"A capital raise still seems unlikely to us, and is overly discounted by the market in our view," Matthew Burnell of Wells Fargo wrote in a note today. Bank of America may reach minimum levels required by regulators in late 2014 by retaining earnings and reducing assets penalized under the rules, he wrote.
Chief Executive Officer Brian T. Moynihan, 51, was questioned about the firm's capital during a conference call yesterday with analysts after posting a record $8.83 billion second-quarter loss. The bank, which faces more mortgage expenses amid state and federal probes on foreclosures, has several years to reach the required capital levels as higher requirements under the Basel 3 rules phase in, the CEO said.
"The phase-in periods for Basel 3 are generous, which should enable them to build capital over time," Keith Horowitz of Citigroup wrote yesterday in a research note. Horowitz advises investors to buy the stock.
Analyst Recommendations
There are 20 analysts who recommend investors accumulate shares of Bank of America, 18 say "hold" and none that recommend selling the stock, according to Bloomberg data.
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 on the largest companies whose collapse would pose a threat to the banking system. Analysts Richard Staite of Atlantic Equities LLC and Jason Goldberg of Barclays Capital have said it may take $50 billion to close the capital gap.
The bank projects it will have a ratio of 6.75 percent to 7 percent by the beginning of 2013, down from a forecast of 8 percent in April. Bank of America has said it can close the gap through earnings from its operations, including its retail branches, the Merrill Lynch brokerage and the corporate and investment banking units. It can also trim assets considered riskier that require capital held against potential losses.
'Underestimating' the Bank
"Many are underestimating the bank's ability to mitigate risk-weighted asset inflation and adapt to the changing environment," wrote Glenn Schorr of Nomura. He has a "neutral" rating on the bank.
Bank of America plans to scale back private-equity investments, run off a loan portfolio and may sell mortgage- servicing rights to reduce so-called risk-weighted assets monitored by regulators. The company projects it will lower the holdings by as much as $250 billion to achieve its goal of $1.8 trillion in the assets by the end of 2012.
The bank is weighing the sale of at least part of its $21 billion stake in China Construction Bank Corp., three people briefed on the plans said last month. The sale would simultaneously raise cash and reduce assets that are penalized under the Basel standards.
Bank of America wouldn't need more capital unless there was "material weakness in the U.S. economy or lower home prices from current levels," wrote Burnell, who has an "outperform" rating on the shares.
Michael Mayo, the Credit Agricole Securities USA analyst who challenged Moynihan yesterday about the bank's ability to withstand a ratings downgrade or losses on European bets, said today that he doesn't foresee a capital raise in his "base case." He said the stock will probably trade at $11 a share in 12 months, compared with his previous estimate of $14.