Regarding this week’s big putback settlement, Oppenheimer’s Chris Kotowski notes that while this goes some way towards resolving the issues hanging over Bank of America’s head, the bank is still in the penalty box.
■ Based on settlement trends BAC now looks adequately capitalised. Based on our analysis we think the company could see as much as $10.1B of future settlement/payments against it’s existing exposure. The positive is that it now has $11.7B of reserves to deal with the issue.
■ Despite being properly reserved, BAC is significantly less capitalised than peers. We estimate that it will take until 1Q16 to get to a 9.5% Basel III Tier 1 common ratio, whereas peers should get there by 2013. Thus, we think BAC remains in the “penalty box” with both regulators and the market.
■ The dilution risk will probably cap any upside in shares. We estimate that if the company wanted to get to a 9% Basel III Tier 1 common ratio by YE2012 an equity raise could be as much as 19.7% dilutive to current shareholders.
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