BofA’s Bad Loans May Have Delayed Plan to Raise Payout, KBW Says

A Bank of America Sign in New York
Pedestrians pass a Bank of America sign in New York. Photographer: Jin Lee/Bloomberg

Bank of America Corp., the biggest U.S. lender by assets, must resubmit plans for a dividend increase to the Federal Reserve because the regulator probably found fault with the firm’s capital, according to KBW Inc.

The bank faces too many unknowns about soured mortgages for the Fed to allow a significant increase to payouts until 2012, Frederick Cannon, director of research at KBW in New York, wrote in a note released late yesterday. Bank of America said March 18 that it would resubmit a dividend proposal in the second half of this year.

“The Fed likely did not agree with Bank of America’s capital plan,” Cannon wrote. “While Bank of America’s capital is sufficient for a bank that is now operating at a profit, the capital levels were simply too far behind peers.”

Bank of America is the only U.S. lender among the largest four that didn’t announce it was boosting payouts after the Fed finished a review of the companies’ financial health and capital plans last week. The Charlotte, North Carolina-based bank needs Fed approval before making a “modest” increase to its penny-a-share dividend, Chief Executive Officer Brian T. Moynihan said this month.

All banks that asked to raise dividends in 2011 were to be informed by today whether the Fed objected, the regulator said in a March 18 report. Those who failed could submit a revised plan as early as April, the Fed said. Firms including Bank of America, which had a 64-cent quarterly payout until 2008, slashed dividends during the financial crisis as loan losses piled up to conserve capital.

Fed Guidelines

The lender “did not request approval for a second-quarter dividend increase,” said Jerry Dubrowski, a Bank of America spokesman. The company “continues to work with the Fed,” he said, declining to comment on reasons the firm has to file another request.

The Fed’s guidelines regarding its capital review make it clear that the regulator objected to some aspect of Bank of America’s plan, Cannon said today in a telephone interview.

“My reading was that ‘maybe’ wasn’t an option for the Fed; either they concurred or they objected to something,” he said.

The ruling was probably a disappointment for Bank of America managers, Cannon wrote in the note. KBW has a “market perform” rating on the company, which Cannon said may boost its dividend to 10 cents a share in the second quarter of 2012.

Fed examiners told some bank executives to reduce or delay plans for returning capital to shareholders, people with knowledge of the process said last week. The people declined to identify specific institutions.

Bank of America’s disclosure “raises the question whether the Fed is comfortable with the plan that the company submitted, or whether the Fed asked Bank of America to resubmit its capital plan” later to monitor their results for several more quarters, said John McDonald, a Sanford C. Bernstein & Co. analyst, today in a research note. He has an “outperform” rating on the bank.

The lender accepted $45 billion of U.S. bailout funds as regulators became concerned that its purchase of Merrill Lynch & Co. in January 2009 would destabilize Bank of America and the financial system. The money has since been repaid.