Bank of America’s Race to Sell
In less than two years, Bank of America has sold 20 assets worth the market capitalization of Goldman Sachs . This comes as CEO Brian Moynihan has said that the company does not need to raise capital by issuing common shares, since the spigot of asset sales is still flowing.
Of course, the face of the price tag on each sale is not representative of what BofA actually adds to capital, which is what regulators care about. Looking at recent deals shows that the net profit can vary widely.
When it sold its $8.6 billion Canadian credit card portfolio to the TD Bank Group, Bank of America netted only $100 million, according to FBR Capital Markets analyst Paul Miller. (A spokesman for the bank disputes that figure, saying BoA netted $270 million under Basel I capital standards, or $477 million by Basel III standards by the sale.) By contrast, its $8.3 billion sale of its stake in China Construction Bank brought some $3.3 billion to the bank's capital account.
Selling the remainder of Merrill Lynch’s BlackRock stake raised $2.5 billion in cash, of which only $377 million was new capital. And selling Balboa Insurance’s property casualty business brought in roughly half of the deal's $1.7 billion price tag
The company has said it intends to sell the following businesses: correspondent banking, its UK and Irish credit card businesses, and mortgage servicing rights. Reports also claim the bank could seek again to sell its consumer mortgage business, a sale halted in October 2010 when prices from would-be buyers fell below expectations.
The company may find the process slows down as it attempts to offload the legacy Merrill Lynch assets, where likely buyers are skeptical about liabilities and keen to do lengthy due diligence. The bank is currently looking to sell its stake in Pizza Hut franchiser NPC International, which could generate about $800 million.
Additionally, Bank of America is in talks to sell some $1 billion in former Merrill Lynch real estate assets to Blackstone , but that process remains in the due diligence stages several months after talks began.
"The sale of cards, strategic investments and MSR's will generate over $10 billion in capital" for the bank , says Credit Suisse analyst Moshe Orenbych. That's an important aid in reaching capital ratios set by regulators.
To comply with Basel 3 regulations, Bank of America’s Tier 1 common equity needs to be about 3 percent of risk-weighted assets by 2013, rising to about 10 percent by 2019. Bank of America plans to have at least double the stipulated number by 2013. Shrinking its total assets is one way of getting there.
FBR analyst Paul Miller estimates that sales so far have cut Bank of America’s risk-weighted assets by about $80 billion—but that it still must reduce them by $170 billion to hit its stated 2013 target.
But that won’t help the shares—down more than 52 percent in 2011 alone . Headcount is also shrinking. Regardless of how many bad assets the company chooses to sell, impending litigation over mortgages looks to weigh on the stock long-term.
Until investors feel confident about what the cost of that will be, the shares are likely to flounder, say analysts.
Clarification: A previous version of this story did not have a statement from Bank of America FBR's $100 million figure.
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