Bank of America Corp. (BAC) Chief Executive Officer Brian T. Moynihan won permission last month for the firm’s first dividend increase since the financial crisis. Now he’s under pressure to salvage the payout after the company mistakenly inflated capital levels by about $4 billion.
One leading option: scrapping a $4 billion share repurchase, said a person briefed on the deliberations. That could allow the Charlotte, North Carolina-based bank to resubmit its request to boost the quarterly dividend to 5 cents, said the person, asking not to be identified because the process is confidential.
Moynihan, 54, has a month to draw up plans that will win Federal Reserve approval after the regulator asked the bank to freeze buybacks and dividend increases. The boost approved in March was heralded as a symbolic victory for Moynihan and the bank, which has had a token penny-a-share payout since 2009.
“This is a step backwards for them, it raises credibility issues for management,” said Jonathan Finger, whose family-owned investment firm, Finger Interests Ltd., owns 900,000 shares of the lender and stands to lose about $144,000 in annual income if Moynihan fails to increase the dividend. “Shareholders have suffered a significant period with no dividends, so some respite from that would be welcomed.”
Bank of America, the nation’s second-largest bank, views the dividend as linked to the company’s ability to generate regular earnings, which was unaffected by the mistake, said the person. The firm isn’t yet certain what payout it will request and may refine the proposal until the due date, the person said.
The predicament arose after the bank found an error in how it valued structured notes inherited in its 2009 acquisition of Merrill Lynch. The Fed responded by asking the firm to resubmit parts of its stress-test capital plan, which is designed to prove that a bank is strong enough to survive an economic shock. Bank of America disclosed the situation yesterday, saying it was hiring an outside firm to review its processes before the resubmission.
The bank’s estimate of Tier 1 capital under coming rules fell to $130.1 billion from $134.2 billion because of the error, the firm said yesterday in a regulatory filing.
The resubmission probably will face closer Fed scrutiny and a higher risk of rejection, said Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor.
The bank’s blunder doesn’t necessarily mean the Fed will reject a revised capital plan on qualitative grounds, as the regulator did with Citigroup Inc.’s proposal, said another person with knowledge of the process. Examiners can’t check all the data provided by banks, the person said.
The Fed regards the incident as bolstering the case for the stress tests because the discovery was handled swiftly, said Barbara Hagenbaugh, a spokeswoman for the central bank. Before the stress tests, finding and fixing the error probably would have been a drawn-out process, she said.
The bank said the revised proposal probably will include lower payouts than the earlier plan, which was already modified once to win Fed approval during the stress tests. At stake are $1.68 billion in annual dividend payments for a company that earned more than $10 billion last year. Before the financial crisis, stockholders were getting quarterly payments of 64 cents a share.