Yesterday after the market close, the Federal Reserve announced the results of Comprehensive Capital Analysis and Review (CCAR). In CCAR, the Fed evaluates capital ratios under distressed financial and economic conditions, the plan to comply with Basel 3 capital requirements, and the capital planning process.
The Fed approved capital plans of 14 fiClick here to enlarge the chart.rms including Bank of America, Citigroup, and Morgan Stanley. Goldman Sachs and JPMorgan Chase received conditional approvals.
The big surprise was approval of Bank of America’s plan to repurchase up to $5 billion of common stock and to redeem about $5.5 billion of preferred stock. These amounts exceeded expectations. The market reacted favorably. In after-hours the stock was up about 4%, and pre-market Friday it is up 3.8% to $12.57.
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“We have simplified our company and we have more than adequate capital to support our strategic plans. We are well positioned to return excess capital to our shareholders,” said Chief Executive Officer Brian Moynihan. “We believe buying back common shares is the best way to continue to drive value for our shareholders.”
It is important to note that the book value of Bank of America is $20.24. The stock trades at approximately 60% of book value. In comparison, JPMorgan’s stock price is approaching its book value. Of course, JPMorgan is a much stronger company and does not carry the mortgage related baggage that Bank of America carries from its acquisition of Countrywide Financial. Herein lies the opportunity. The housing market is getting better. CCAR assumes severe distress in housing conditions and now due to courtesy of the Fed, we know that Bank of America can survive such circumstances with flying colors…Read more at Forbes.