Extra billions will help bank digest Merrill acquisition, newspaper says
SAN FRANCISCO (MarketWatch) — The government is close to committing billions in additional aid to Bank of America Corp. to help the giant bank digest its acquisition of Merrill Lynch & Co., the Wall Street Journal reported late Wednesday, citing unidentified people familiar with the situation.
“Even with help from the government, we think Bank of America’s tangible equity levels are low relative to peers and that it will need to cut its dividend and or raise equity capital in the coming months,” Stuart Plesser, a diversified financial services analyst at Standard & Poor’s Equity Research, said.
– BofA may need billions for Merrill – report (CNNMoney)
– Bank of America seeks billions from US to cinch Merrill deal (USA Today)
– Merrill Lynch Turns into a Black Hole for BofA (BusinessWeek)
– BofA, Citi May Need Another Slice Of TARP (Forbes)
Scott Silvestri, a spokesman for Bank of America, declined to comment, as did a Treasury spokeswoman.
The news suggests that the worst of the banking crisis may not have passed. The KBW Bank Index has dropped 19% so far this year. Citigroup lost more than a third of its market value this week as it became clear the bank will try to shrink itself under pressure from big losses.
Bank of America shares dropped 3.3% to $9.87 during after-hours trading on Wednesday. That followed a decline of more than 4% during regular trading.
Bank of America already got a $25 billion investment from the Treasury Department last year. But the bank told the Treasury in mid-December that it was unlikely to complete its purchase of Merrill because the brokerage firm had suffered larger-than-expected losses in the fourth quarter, the Wall Street Journal said, citing a person familiar with the talks.
Treasury was concerned that the deal’s failure could affect the stability of U.S. financial markets, so it agreed to work with Bank of America on a plan that includes new government capital, the newspaper explained. Details are expected to be announced when the bank reports fourth-quarter results, scheduled for Jan. 20.
Any possible arrangement might protect Bank of America from losses on Merrill’s bad assets. There would be a cap on the amount of losses the bank would have to absorb with the federal government being on the hook for the remainder, the Journal said.
Bank of America closed its acquisition of Merrill on Jan. 1. However, the deal was completed with the understanding that the Treasury and the bank would hammer out a plan to provide more government support, the newspaper added.
The report may increase concerns about fourth-quarter results for the banking and brokerage industries.
Deteriorating loan quality, continued losses on risky securities, and goodwill impairments will result in losses for the 27 major banks covered by Jonathan Glionna and Miguel Crivelli, fixed income analysts at Barclays Capital, according to a fourth-quarter industry preview they released on Wednesday.
The recession will cause problems in loan portfolios to spread from residential-related products to credit cards and commercial real estate, leading to materially higher nonperforming assets and exposing the inadequacy of banks’ loan loss reserves, they added.
“With unemployment reaching 7.2% and GDP declining, we expect nonperforming loans to increase substantially, from $94 billion to $125 billion for our 27-bank aggregate,” the analysts wrote. “This will force banks to set aside large loan loss provisions, impairing earnings.” The only bright spot is that the government will continue to support large, important banks like J.P. Morgan Chase, Bank of America and Wells Fargo, they added. J.P. Morgan is scheduled to report Thursday morning. See full story.
Citigroup will report on Friday morning. The Journal said on Wednesday that Citi executives are bracing for an operating loss of at least $10 billion.
That’s spurred the bank to develop a drastic plan to sell lots of businesses and try to shrink its roughly $2 trillion balance sheet by a third, the newspaper added.
Citi shares lost 23% on Wednesday to close well under $5 as investors worried that the bank may struggle to sell units and unwind positions at attractive prices in the midst of turbulent markets.
“We are embarked on a long-term transformation of Citi,” Chief Executive Vikram Pandit told employees in a memo that was released publicly on Wednesday. “Our goal is to streamline our operations, strengthen our balance sheet, position ourselves to take advantage of historic global growth opportunities.”
“Economics and psychology are both important in the markets,” he added. “The economic model of our business is sound and positions the company for success over the long term. The clarity we provide as we report earnings should address the psychology of the market.” Alistair Barr is a reporter for MarketWatch in San Francisco.
By Alistair Barr
Last update: 8:32 p.m. EST Jan. 14, 2009