Bank Of America Is Trading Profits For Capital


[credit provider=”AP”]

When your stock is in the gutter, and everyone is worried about your capital levels you basically have no choice but to dump profitable assets for the sake of getting cash now.Yesterday, Bank of America announced the sale of its international credit card business.

Wells Fargo explains:

BAC: Exit of International Cards a modest negative for EPS but a positive for capital. BAC announced a definitive agreement to sell its $8.6B Canadian card portfolio to TD Bank. The transaction is expected to close in Q4 2011, with the company guiding to a “modest” improvement in Tier-1 capital (T1C) ratio as well as tangible book value by the expected YE 2011 closing of the transaction. Despite the modest expected benefit to capital from the transaction, we are maintaining our valuation range of $9.50-$11.50 to account for elevated volatility in the shares and heightened macroeconomic uncertainty. High return business but a small contributor to the bottom line. According to BAC, the Canadian portfolio generated approximately $1B in annual revenue. Assuming a 45% efficiency ratio and approximately 3% provision rate (versus the current loss rate of 6.4%), we estimate ROTE is in the high-teens. However, it contributes only about 1% of BAC’s core YTD net income.

We estimate the European portfolio generates an additional 3% of BAC’s core YTD net income. BAC has publicly stated its desire to reduce its card portfolio balances to $150B ($153B at 6/30/11). The divestiture of approximately $27.6B of card receivables could presumably free up the balance sheet to support future U.S. card portfolio growth with customers that have a higher propensity to carry other products with BAC, while maintaining an appropriate level of aggregate card exposure.