Bank of America Corp (NYSE:BAC) doesn’t handle stress well.
For the third time in five years, BAC received some bad marks on its Federal Reserve stress test. Importantly, that won’t derail a planned BAC stock repurchase program, but it sure doesn’t instill confidence in Bank of America management either.
And it’s not like the Fed’s conditional approval of Bank of America’s capital planning process doesn’t have real-world consequences.
After all, BAC was only one of six banks that failed to increase its dividend after the test results. The payout will remain at a nickel a share per quarter.
Even Citigroup Inc (NYSE:C) — the previous poster boy for big-bank incompetence — aced the Fed’s stress test. That allowed the bank to hike its quarterly dividend to 5 cents a share from a penny — Citigroup’s first dividend increase since the financial crisis.
The Fed had no problem with Bank of America’s capital levels. BAC should be able to remain solvent in a financial-crisis type meltdown. Rather, the Fed has concerns about “deficiencies in its capital-planning process” and its internal controls.
Bank of America has until the end of September to resubmit its plans that would alleviate Fed concerns. Given the BAC track record, Bank of America shareholders should keep their fingers crossed that the bank doesn’t bungle this, too.
The brand-spanking new $4 billion share repurchase is at stake, as well as any hope for a dividend increase before the end of the year.
“Over the last few years, we have simplified the company, sharpened our focus on serving customers and we are returning capital to our shareholders,” BAC CEO Brian Moynihan said in a statement.
Well, yeah, the bank is returning capital to shareholders, but not nearly as much or as quickly as it could if it didn’t keep getting “incompletes” on its stress tests. Bank of America had to scale back its plans to return cash to shareholders twice last year.
In one case, the Fed said dividend hikes and share buybacks could cause BAC to fall below minimum capital requirements. The second time, Bank of America discovered an accounting error that had been going on for years. While other banks were buying back their own stock, BAC had to suspend its program until it sorted out those issues.
Bank of America Lags Peers
The end result is that Bank of America looks shabby when compared to generally competent major banks. Just look at JPMorgan Chase & Co. (NYSE:JPM). The nation’s biggest bank by assets passed the test, giving it the go-ahead for a $6.4 billion in stock buybacks and a dividend hike. Wells Fargo & Co (NYSE:WFC) will likewise be raising its dividend.
At current share prices, the JPM dividend increase — to 44 cents a quarter from 40 cents — would put the yield at 2.87%. WFC’s increase — to 37.5 cents from from 35 cents — would bring the yield up to 2.89%.
Those are decent yields in today’s ultra low-rate environment. Bank of America, meanwhile, sports a dividend yield of 1.3%.
Share price performance has been (understandably) poor, too. WFC is up 19% and Citigroup’s up 111% over the last 52 weeks. JPM gained 7%. Bank of America, meanwhile, is down more than 7% over the same span. (The S&P 500 gained 11% over the last year.)
If past is prologue, BAC will have no trouble getting Fed approval of its resubmitted plan.
But it also means Bank of America could get dinged again next year. Stress tests are an annual rite for the nation’s largest banks. BAC needs to ace this thing next year, or it could become a permanent headwind for Bank of America stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.