(Bloomberg News) Bank of America Corp.'s $33 billion plunge in market value over the past week has stoked concern that Chief Executive Officer Brian T. Moynihan needs to raise capital even as his options for finding it narrow by the day.
The lender declined 34 percent in New York trading from Aug. 1 through yesterday amid signs it may face more expenses tied to soured mortgages, and that a stagnating U.S. economy will curb revenue. The firm traded at 32 percent of its book value, the lowest among the 10 largest U.S. lenders, reflecting doubt about the true worth of Bank of America's assets.
Moynihan, 51, repeatedly said this year that the Charlotte, North Carolina-based bank doesn't need to raise capital, a move that would reduce the value of the stake held by current investors. Analysts who initially agreed with him including Mike Mayo at Credit Agricole Securities USA now won't rule out the idea, and are speculating about parts that could be sold including the Merrill Lynch units.
Raising capital at yesterday's $6.51 share price would be "a massively dilutive exercise," said Paul Miller, an analyst at FBR Capital Markets with a "market perform" rating. "They probably don't need to right now, but every day there's another lawsuit out there that has merit," he said, citing litigation tied to subprime lender Countrywide Financial Corp. "How in the heck are they going to settle all these suits unless there's some way to break away from the Countrywide liabilities?"
Bank of America, the largest U.S. lender, advanced advanced 7.8 percent to $7.02 by 10:40 a.m. in New York Stock Exchange composite trading, recovering part of yesterday's 20 percent decline. Citigroup Inc., ranked third by assets, advanced 9.1 percent to $30.49, retracing some of its 16 percent tumble. Both needed taxpayer money to stay afloat during the worst of the credit crunch, which they've since repaid. Bank of America faces demands for refunds on home loans from U.S.-controlled firms that still haven't paid back their bailouts, such as American International Group Inc. and Fannie Mae.
The two banks led yesterday's 12 percent decline of the 24-company KBW Bank Index after Standard & Poor's downgraded the credit of the U.S. government late last week, casting doubt on federal backing for U.S. lenders and increasing speculation that the world's largest economy may stall into recession.
"The bias that exists, and that is gaining credibility, is that a double-dip is ahead of us," said Charles Peabody, an analyst at Portales Partners LLC. "If that's the case, then something like Bank of America is going to have to raise substantial equity externally." Peabody rates Bank of America a "buy," and said he doesn't think the firm will raise capital.
Swaps aAnd Options
Signs of investor doubt appeared in financial markets yesterday as credit-default swaps on Bank of America rose by the most on record and reached the highest price since May 2009. Options traders seeking protection from more losses pushed prices on the contracts to the highest since April 2009 and lifted volume on bearish bets to more than 1 million contracts, five times the four-week average.
"This is a scary, scary market," said Gary Townsend, a founder of Hill-Townsend LLC in Chevy Chase, Maryland, who added that he sold his fund's 200,000 Bank of America shares before they fell below $9. "To protect my investors and so I could sleep at night, I thought it was wise to sell out of some things that looked as though they had no support."
Show Of Support