I want to preface this post by saying that I don’t believe that Bank of America will have to raise more capital. The bank has $12 in tangible book value per share, a TCE ratio of 5.87%, a tier 1 common ratio of 8.23% and a total capital ratio of 15.65%. Additionally, BAC has assets which it could sell at gains in a worst case scenario which would raise capital levels without dilution.
- In 2009 at the height of the credit crisis, the stress tests (which stressed the bank for depression equivalent credit deterioration) determined that BAC needed to raise $33.9B.
- In order to be more strenuous, lets assume that BAC must raise another $50B today, at a price about 30% below where the stock is trading today: $5 per share.
- This means that in order to raise a hypothetical $50B, BAC would have to issue 10B shares at that level.
- At the end of 2Q11, BAC had approximately 10 Billion shares outstanding, so 10B more shares would double the share count to 20B shares.
- Bank of America had $2.26T in assets as of the end of 2Q11. Let’s say this shrinks at 5% per year for 2 more years, BAC would have about $2T in assets at that point.
- The ROA for the entire banking industry in 1Q11 was approximately 0.80%, this likely increased in 2Q11. WFC for instance in 2Q11 earned an ROA of 1.25%.
- If we apply the industry ROA of 0.80% to BAC’s hypothetical assets of $2T, this means BAC would earn $16B in a normalized environment. To be clear, I think BAC can earn a lot more than 0.80% ROA and will likely have more than $2T in assets, but these are stressed assumptions.
- $16B earnings/20B shares = $0.80 eps after dilution.