Bank of America - Equity Raise Acheived

Another headline on the tape for BAC this morning:

Bank of America Corp. (BAC) has received confirmation from the Federal Reserve that the company fulfilled its commitment to boost its equity by $3 billion, a spokesman for the bank said Monday morning.

The bank, the largest U.S. bank by assets, committed to raising $3 billion in equity capital when it received approval to repurchase $45 billion in preferred stock in December 2009 acquired as part of the Troubled Asset Relief Program. The Charlotte-based bank faced a year-end deadline to raise the equity.

Bank Of America sought to raise the capital by selling assets.

If the bank hadn't raised the capital by the deadline, it said it might have to pay some employees' bonuses in stock instead of cash. The bank also warned investors it might need to make a dilutive share offering to raise the capital.

Bank of America sold such assets as 51.2 million shares in BlackRock Inc. (BLK) and the right to purchase additional shares in China Construction Bank Corp. 

I am somewhat torn on the Blackrock sale weighing core business vs. investment prospects.  That said, the combination of some legacy agency put-back issues being put to rest and the equity all clear by the Fed puts a nice base under the company.  I believe the equity and debt will have a good year this year and are decent investment candidates.  Admittedly, I am long BAC common and Merill preferreds.  I have a bigger position in Citi, however, as I believe it is better positioned, has less headline risk and wikileaks doesn't seem to be in the cards.

Citigroup - Taking debt Out of Bad Bank

As I own Citigroup equity and preferred, I saw an interesting item come up on my alerts today.  Citi filed an 8-k announcing an exchange and consent offer for $392 million of CitiFinancial Credit (formerly Commercial Credit Corp) debt.


Essentially, this is an exchange of Citi Holdings Co ("Bad Bank") into Citigroup notes.  It would appear to me that Citigroup is preparing to shed assets of Citi Holdings and the buyer is not going to assume the debt associated with the assets.


The exchange and consent memorandum is expected out starting today - I haven't found it on EDGAR, but if anyone wants to forward it, that would be great.




From the 8-k:

The purpose of the Exchange Offer and Solicitations is to provide Citi Holdings greater flexibility with respect to the business and assets of CitiFinancial Credit Company.

The exchange details: 

Eligible Holders have the opportunity to either (i) exchange any and all of their outstanding Old Notes for Citi’s intermediate term benchmark notes (the “New Citigroup Notes”), thereby delivering consents, or (ii) deliver consents for the Consent Payment without tendering their Old Notes, upon the terms and subject to the conditions set forth in the Offering Memorandum and Letter of Transmittal.  Eligible Holders who deliver their Old Notes in exchange for New Citigroup Notes in the Exchange Offer will not be eligible to receive the Consent Payment as the Early Exchange Consideration will be consideration for such Eligible Holder’s consent (provided that the Eligible Holder tenders the Old Notes prior to or on the Early Tender Date (as defined below) and does not withdraw them prior to the revocation deadline (as described in the Offering Memorandum).

PIMCO Buying Bank Debt - Good Trade

I hate to say it, but "good call!" to PIMCO on buying bank bonds.  I could not agree more that there is value in bank debt - I am still staying at senior level, but sub level could be an interesting bet.

Some levels:
BAC '21s  +240
C   '20s  +185/10s
JPM  '18s  +80/10yr

Pacific Investment Management Co., manager of the world’s biggest bond fund, is betting the rally in U.S. bank bonds is set for further gains with economic growth ready to accelerate next year.

Bank of America Corp. and Citigroup Inc. are poised to be “two of the stars” in fixed-income markets in 2011, said Mark Kiesel, the global head of corporate bond portfolio management at Pimco in Newport Beach, California. The largest U.S. lenders are an attractive value compared with “every bank you can buy in the world,” he said.

Pimco, which boosted its forecast for economic growth last week, reaffirmed its conviction in bank bonds after the securities returned 7.62 percent this year, lagging behind the gain of 7.95 percent for investment-grade company debt, Bank of America Merrill Lynch index data show. Lenders and other U.S. corporate borrowers will benefit as the economy revives following President Barack Obama’s agreement to extend tax cuts, Kiesel said.

“That was the catalyst that sparked upward revision in growth,” said Kiesel, who was nominated for fixed-income manager of the year by Morningstar Inc. “That Obama is showing some indication he’s willing to move more toward the center, that’s net-net going to be marginally more positive for business.”

Disclosure:  Long BAC and C common and preferred. - If I like the lower parts of the cap structure, the fundamental thesis is there.  I think the value is too.

Banks - Stress Test II before Capital Distribution

Press release by the Fed:

The Federal Reserve Board on Wednesday issued guidelines for evaluating proposals by large bank holding companies (BHCs) to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock. The criteria provide a common, conservative approach to ensure that BHCs hold adequate capital to maintain ready access to funding, continue operations, and continue to serve as credit intermediaries, even under adverse conditions.
The criteria for evaluating capital distributions are outlined in a revised temporary addendum to Supervision and Regulation letter 09-4, "Dividend Increases and Other Capital Distributions for the 19 Supervisory Capital Assessment Program Firms." The guidelines state that any capital distribution plan will be evaluated on the basis of a number of criteria, with particular emphasis on:

• the firm's ability to absorb losses over the next two years under several scenarios, including an adverse macroeconomic scenario specified by the Federal Reserve and adverse scenarios appropriate for a particular firm's business model and portfolios;
• how the firm will meet Basel III capital requirements as they take effect in the United States, in the context of the proposed capital distributions as well as any anticipated impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the firm's business model or capital adequacy; and
• the firm's plans to repay U.S. government investments, if applicable. BHCs are expected to complete the repayment or replacement of any U.S. government investments in the form of either preferred shares or common equity prior to increasing capital payouts through higher dividends or stock buybacks.

The Federal Reserve expects to respond to capital distribution requests beginning in the first quarter.
The Federal Reserve will evaluate requests for planned capital actions in the context of its broader process for assessing capital adequacy at the largest BHCs. As part of the regular supervisory process, the Federal Reserve is requesting that large U.S. BHCs submit comprehensive capital plans by early next year, regardless of whether a capital action is planned. The capital plan review is the latest step in the Federal Reserve's efforts to enhance supervision of banking organizations. As recognized by the Dodd-Frank Act and demonstrated by the Federal Reserve-led Supervisory Capital Assessment Program in 2009, regular, horizontal reviews across groups of firms provide regulators with both firm-specific and industry-wide perspectives of various issues and trends. The Federal Reserve plans to undertake these capital plan reviews on a regular basis and will consult with primary federal bank regulators.

This is stress test part II.  Before the BHCs can begin releasing capital through dividends, they are going to have to show that they, essentially, have surplus capital to return.  Positive for bank longevity, but the anticipation of individual results and the headline gussing could lead to volatility.

Disclosure:  Long XLF, C and BAC (equity and preferred positions)

Citi - First Blush

Citigroup's Tier 1 Capital ratio was 12.5% (T1 capital stands at $125B), compared to 11.99% in the second quarter 2010. Citigroup's Tier 1 Common ratio was 10.3%, up from 9.71% in the prior quarter. - Targeting to operate in a Tier1Common ratio range of 8%-9% under Basel 3, but targeting those levels in 2012.

Citigroup's total allowance for loan losses was $43.7 billion, or 6.73% of loans.  There was a loan loss release of nearly $2B during the quarter (following a $1.5B release in Q2) - primarily from the Citigroup "bad bank" entity.

Citigroup revenues were $20.7 billion, down $1.3 billion sequentially, on lower Local Consumer Lending and Securities and Banking revenues.

Citigroup net credit losses declined $303 million, or 4%, sequentially to $7.7 billion, reflecting continued improvement across most consumer portfolios.

$2.5B in mortgage repurchases YTD,  $952MM in repurchase reserves.

All in, a decent quarter.  Citi, due to the govt intervention and backstop, is one of the cleaner banks among their peers.  Citi Holdings continues to shrink as a % of assets.  Capital ratios are strong and the bank is targeting 2012 for being Basel 3 compliant.

I like Citi vs. BAC and JPM vs. Wells