Bank Of America: All About Return On Equity And Valuation (Part II)

In my prior article on Bank Of America (NYSE:BAC) - (Bank Of America Capital Position: Mostly Smoke And Mirrors (Part I)), I covered in detail its most recent capital position.

It is worth recounting the key points (given its relevance to this article):

  1. BAC CET1 ratio under the advanced method on a fully-phased basis is estimated at 9.3% as of Q2 2015. The rest of the capital ratios highlighted by BAC are less relevant (or put less diplomatically, simply "smoke and mirrors").
  2. Current minimum CET1 requirement (including G-SIB surcharge) is 10%. However, given CCAR is the real binding constraint - realistically, BAC is looking north of 11% CET1 ratio (or higher, depending on whether the Fed includes G-SIB buffers in upcoming CCAR processes)
  3. I have little doubt that BAC will comfortably 'catch-up' well before 2019 (it can accumulate more capital and/or reduce RWAs).
  4. However, it is a material valuation point as it impacts (i) capital ask trajectory (lower dividends/buybacks for longer (ii) dilutes return on equity (all else being equal) (iii) competitive disadvantage versus other large banks (due to capital/leverage ratios' relative weakness).

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