Tuesday August 23 was a dramatic day for Bank of America.
First the bank’s stock tanked to lows not seen since 2009 – $6.01. Then the bank blamed the morning drop on our Henry Blodget in a weird, sarcastic statement released by BofA PR. He had written about the market opinion that the bank doesn’t have enough capital earlier that morning, before the drop.
Then JPMorgan released a note saying that it was upgrading BofA from underweight to neutral and a blog, 24/7 Wall Street, interpreted it to mean that JPMorgan might buy Bank of America.
Needless to say, the latest analysis by JPMorgan, despite what inconceivable rumours it sparked, is spot on. It says that Bank of America’s stock price is now reacting to irrationality. If today’s wild events show anything, it’s that.
And also, the bank of course needs to do something to convince the market it has enough capital.
FT Alphaville has more of the latest BAC research update, in which JPMorgan analysts write:
We estimated a capital shortfall $12bn (assuming a target Basel III Tier 1 common equity ratio of 7.5% at YE’12) under our base case; our Bear case suggests a $25bn shortfall. At this point, we think it is important to maintain perspective; our estimated shortfall is not huge, and is eminently feasible in our view. This is also a relative shortfall; the company remains very well capitalised by historical standards.
The equity and credit markets are becoming increasingly clear in their message that the company needs to address the capital and mortgage issues; we think it is getting more difficult for management to ignore this sentiment. In our view, this raises the likelihood of a credit-positive development, such as an announcement of a capital raise.
We cannot ignore the reality that current challenges are solvable. With CDS trading wider than at the peak of the financial crisis, current valuations appear to us to reflect irrationality, rather than the true, manageable, scope of issues facing the company.
On a positive note, CEO Brian Moynihan’s nickname is apparently Tazmanian Devil, which suggests he’s used to whirlwinds like this.