Stock research firm FBR has had trouble with its analysis about the banking industry before. It recently wrote that the US banking system needs at minimum $1 trillion in new tangible common equity. The estimate was laughed off by a few experts and seen as remarkably by others.
Now, FBR is claiming that Bank of America (BAC) will need $60 billion to $70 billion in new capital. According to FT Alphaville, the analysis is based on a 12% unemployment rate in the US. Using that data and other analysis points from the bank “stress test”, FBR says B of A will need that cash to keep its tangible common equity above 3% at the end of 2010.
There are several arguments against the FBR statement. The first is that the Treasury and FDIC have said that the TARP has enough money in it, at current levels of $110 billion, to cover capital shortfalls from the bank tests. If B of A needs $70 billion all by itself, the TARP would almost certainly be overextended.
Second, and perhaps just as important, is that almost no one else on Wall St. buys into the analysis, despite the fact that some of the smartest securities analysts in the world are keeping their eyes on the bank. Over the last month, B of A shares are up far more than JP Morgan’s (JPM) or Citigroup’s (C). With a market cap of only $52 billion, a new $70 billion investment would hammer current shareholders. The stock is certainly not trading that way.
Douglas A. McIntyre
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