Oct. 23 (Bloomberg) -- Bank of America Corp., the lender that got a $5 billion boost from Warren Buffett last year, now has the “top capital” among peers and is capable of paying a bigger dividend, said Chief Executive Officer Brian T. Moynihan.
The bank has fulfilled a goal Moynihan drilled into subordinates since his first day on the job: building a “fortress balance sheet,” he said in an Oct. 17 staff meeting at the company’s Charlotte, North Carolina headquarters. A person close to the bank, acting on the condition of anonymity, enabled Bloomberg News to listen to the meeting.
“We’re going to officially declare victory on one of those operating principles,” Moynihan said in the town-hall style meeting. “The reason why is, we have the top capital in the industry, the top liquidity in the industry.” People have stopped asking if the bank needs more funds to absorb losses and now want to know when investors will get the excess, he said.
His display of confidence is a turnaround from last year, when investor concerns about the bank’s health spurred Buffett’s Berkshire Hathaway Inc. to offer a $5 billion injection, just as it had done for Goldman Sachs Group Inc. during the financial crisis. Bank of America went from trailing peers to having the industry’s best balance sheet, Moynihan said last week.
Unlike last year, the CEO avoided saying the dividend would increase, telling staff that he won’t “get ahead” of the Federal Reserve’s 2013 approval process. Moynihan, 53, was criticized in 2011 for implying the dividend would rise, only to have the central bank reject his request. The company passed this year’s Fed stress test by leaving payouts unchanged.
Moynihan’s remarks about capital could be premature if costs from defective mortgages and litigation are worse than expected, said Paul Miller, an FBR Capital Markets analyst who has a hold rating on Bank of America shares. Faulty home loans and foreclosures have cost the lender more than $40 billion since the start of 2007, data compiled by Bloomberg show.
“They still have a lot of liabilities, and it’s going to put pressure on their capital base if these lawsuits go the other way,” Miller said. “What he has done is shrunk the balance sheet more than generated a lot of capital.”
Capital may be no better than at other large banks, according to a Barclays Plc research note last week. To arrive at an estimate of an 8.97 percent Tier 1 common ratio in the third quarter, Bank of America assumed regulators would approve how the firm measures its risk-weighted assets, wrote Brian Monteleone, a Barclays credit analyst.
That assumption added 0.4 to 1 percentage point to the capital ratio, and removing it would “pull Bank of America back into the pack of peers’ disclosed ratios,’’ Monteleone wrote. Goldman Sachs and JPMorgan Chase & Co. have ratios of about 8.5 percent without the assumption Bank of America makes, he wrote. Morgan Stanley’s exceeded 9 percent, Chief Financial Officer Ruth Porat said Oct. 18, a day after Moynihan’s staff meeting.
Bank of America’s capital has improved quickly, making the chances for a dividend increase or stock repurchases in 2013 “much better,” Ed Najarian, an analyst at International Strategy & Investment Group Inc., wrote last week in a note. Larry DiRita, a spokesman for the lender, declined to comment.
Bank of America climbed 72 percent this year to $9.55 a share through yesterday, the best performance in the Dow Jones Industrial Average.
The meeting gave Moynihan an opportunity to demonstrate how his firm is recovering after buying Merrill Lynch & Co. and Countrywide Financial Corp. during the financial crisis. The 1-cent quarterly dividend, smaller than JPMorgan and Wells Fargo & Co.’s, is a vestige of the duress Bank of America faced when it took $45 billion in U.S. bailouts, which was repaid in 2009.
Boosting the payout “will be on the table” after the next Fed stress tests in March, Moynihan said. Regulators judge banks’ progress under tougher international capital guidelines before allowing them to take actions including dividend increases. The world’s biggest lenders must reach Tier 1 capital levels of at least 9 percent by 2019 under Basel Committee on Banking Supervision rules.
“All of the capital we have above the level we need, which is 9 percent, will go back to the shareholders at some point,” Moynihan said. “We are done with where we are supposed to be in six years today. If we did not earn a dollar, we would not have to raise another dollar of capital.”
Bank of America’s struggles have fed critics who call the biggest banks too large to manage and say they put taxpayers at risk. Moynihan called his company the “poster child” of a financial firm that’s become smaller and less risky.
“The fear of bigness is a misplaced fear,” he said. “If you look back at history, it’s actually the small institutions that failed and caused the problem; the big ones were there to take them.”
In the staff meeting, which was broadcast to Bank of America offices worldwide, Moynihan and CFO Bruce R. Thompson portrayed the firm as having stabilized revenue from consumer and corporate units while cutting costs and sloughing off liabilities from previous acquisitions.
Bank of America trimmed 2,866 workers in the third quarter amid Moynihan’s cost-cutting plan, which seeks at least 30,000 job reductions and $8 billion a year in savings. That left the company, the biggest employer among U.S. banks, with 272,594 workers by Sept. 30.
“We are dropping about 3,000 a quarter, and we should stay on that path, as best we can tell,” Moynihan said. “We’re trying to mitigate the human side of this by looking for every place we can have our teammates join us and do something else.”
The bank has an annual attrition rate of 10 percent, which means that managers are aided in their headcount-reduction goals by simply not hiring in some areas, the CEO said.
The firm posted third-quarter net income of $340 million, breaking even on a per-share basis, after a legal settlement tied to the Merrill Lynch takeover and accounting charges almost wiped out profit. That beat the average estimate of a 7-cent loss by 15 analysts surveyed by Bloomberg.
“I don’t think we’ve ever had a quarter where we had zero earnings per share and felt as good about the progress we made,’ Thompson told staff.
Employees asked Moynihan when legal expenses from the takeovers of Merrill Lynch and Countrywide will subside. Disputes with Fannie Mae and MBIA Inc. over who should bear the costs of defective mortgages may be settled if the firms are reasonable in their demands, the CEO said.
Unresolved demands that Bank of America repurchase mortgages rose 12 percent to $25.5 billion as of Sept. 30, fueled by disputes with Fannie Mae and private investors, the firm said last week. FBR’s Miller has said the company hasn’t set aside enough reserves to cover such claims.
‘‘When you go to other-than-mortgage litigation, there will always be something,” Moynihan said, rattling off a list of potential cases, including a U.S. probe into the marketing of identity-theft protection products to credit-card customers. “We’ll pay that, but that’s a lot different than what we’re spending today. Those will kind of come down.”
Moynihan, who has sold more than $50 billion in assets and businesses since taking over in 2010, discussed the benefits of managing a smaller firm. He has sold or shut down mortgage, credit-card and wealth-management units acquired by his predecessor, Kenneth D. Lewis.
“Another area that avoids litigation risk is to keep the franchise as narrow as you can,” Moynihan said. “If you’re going to step on a rake and have it hit you in the nose, it’d better be for a core customer activity.”
To contact the reporter on this story: Hugh Son in New York at email@example.com