A year is a long, long time in banking. Just 12 months after Bank of America received its first slug of government funds, the bank is repaying the Treasury's entire $45bn investment. That is good news for taxpayers, who have pocketed about $2.5bn in dividends to date, and are left with only one real mega-bank, Citigroup, as an ongoing concern. More perplexing, perhaps, is why shareholders, who marked BofA's shares up 3 per cent in after-hours trading, are so pleased.
Shareholders are being strong-armed into approving common stock issuance required to raise $18.8bn – “common equivalent securities” will be issued with dilutive penalties if they refuse. But the bank perhaps could have waited until stronger earnings gave it greater wherewithal to repay its debts. The need to bump up capital ratios means $4bn must also be found through asset sales, supervised by the Federal Reserve. Among the stress test banks, BofA has one of the highest percentages of realised to expected losses, according to Barclays Capital, with more undoubtedly still to come. With or without government money, banks remain a risky bet.