Last updated: April 28, 2014 6:01 pm

BofA suspends buyback and dividend plans

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Bank of America has suspended its $4bn share buyback programme and its first dividend increase since 2007 after discovering an accounting error that will force it to redo its stress tests with the Federal Reserve.

The accounting mistake relates to the treatment of structured notes issued by Merrill Lynch, which BofA agreed to buy at the height of the financial crisis in 2008. Rectifying the error cut the bank’s common equity tier one capital by $4bn.

News of the setback – including suspension of the quarterly dividend rise from 1 cent to 5 cent a share – sent the bank’s shares down 6.3 per cent to $14.95 by the New York close. It was BofA’s biggest daily drop since November 2012.

One of BofA’s top 10 shareholders said: “It’s frustrating, unfortunate, it’s a stupid mistake, should have never happened. But that combined with all of BofA’s legal and regulatory headlines over the past five years, and even this year to date, it’s quite unbelievable – it’s never-ending.”

Big US banks have to get their capital return plans approved by the Fed after undergoing rigorous stress tests of their capital levels under different economic and financial scenarios.

The annual process has brought unexpected twists including criticism of the opaque qualitative aspect of the tests – which Citigroup failed – and the Fed’s own revision of results only days after announcing them last month.

But the disruption to BofA’s plans has raised questions about the bank’s management of its regulatory processes and its future ability to boost capital returns. BofA had already resubmitted its plan once, to ensure it had secured the Fed’s approval for its capital return programme, alongside Goldman Sachs.

By having to take the stress tests again, BofA is now the first leading US bank to be forced to resubmit its plans having earlier secured the Fed’s authorisation.

“BofA has had issues with the process in the past, so this does raise concerns about how it performs on a qualitative basis in the future,” said Jason Goldberg, analyst at Barclays Capital.

In 2011, the Fed rejected BofA’s dividends plans and, in the following year, the bank did not request capital return increases. Last year, the bank passed the test but held its dividend at 1 cent per share.

BofA was also the only big US bank to see its tier one common ratio – a key capital measure – fall below 6 per cent in last month’s stress tests.

“I don’t think this is something that you can pin on the idea that BofA is too big to manage,” said Matthew Burnell, analyst at Wells Fargo.

Citigroup failed the tests on a qualitative basis and has halted planned increases to its share buyback and dividend plans. In objecting to Citi’s plans, the Fed cited “inadequate” improvement in areas flagged as needing more attention and finding fault with Citi’s ability to estimate revenue and loss projections.

As a result of its error, BofA cut its capital metrics – including its closely watched Basel III fully-phased in common equity tier one capital ratio – by 27 basis points to 9 per cent, placing it below its peer group, by Barclays estimates. But the bank still surpassed its minimum required ratio of 8.5 per cent.

BofA has 30 days to resubmit a capital plan unless it receives an extension.

“Bank of America must address the quantitative errors in its regulatory capital calculations as part of the resubmission and must undertake a review of its regulatory capital reporting to help ensure there are no further errors,” the Fed said in a statement.

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