That’s the view of FBR Capital Markets and it is somewhat at odds with reports that claim Bank of America was facing a capital shortfall of just $1bn or so based on the early results of the US banking stress tests.
So how does FBR, which admittedly has a love of big numbers, come up with this figure?
Analyst Paul Miller explains:
Using our 12% unemployment rate scenario from last week’s report (“Stress Testing Nine Banks—It’s All About Unemployment,” April 22, 2009), we estimate that BAC needs at least $60 billion to $70 billion in capital to maintain a TCE ratio above 3% at the end of 2010.
FBR stress test vs. Treasury stress test. We must point out that FBR’s stress test is somewhat tougher than the government’s current stress test with respect to losses, given that FBR projects an unemployment rate of 12% and the government’s stress test assumes a 10% unemployment rate. We also note that the government takes a much harder look at off-balance-sheet risk, which could be the wild card in any stress test scenario.
And provides a table.
Miller says with some understatement that BoA would find it difficult to raise that sort of money in today’s environment. So as a first line of defence, FBR reckons BoA should convert $27bn of private and TARP preferred stock to common equity:
This will boost the tangible common equity ratio to roughly 4.3% today, reduce the preferred dividend expense, and bring much-needed capital stability to Bank of America.
Related links:
And the results of the US bank stress test are… – FT Alphaville
DIY stress test – FT Alphaville