The rising panic surrounding Bank of America naturally evokes the Lehman episode of late 2008. Shares in America’s largest bank by assets fell another 2 per cent on Tuesday and have halved since the beginning of May. The reason? Depending on which expert you listen to, BofA is either perfectly fine or needs to raise up to $200bn in new capital.
That is quite a range. But while it is easy to dismiss the bloggers and short sellers of the stock, that such big numbers are thrown around at all highlights the fundamental problem of banks: their asset values have to be taken on trust. And it is only natural that this trust comes under increasing pressure when the value of a lot of those assets (in this case prices underpinning BofA’s $460bn worth of real estate-related lending) continues to fall. Investors also remember how quickly questions about asset prices can morph into a liquidity crisis.
But the reality is you either have to believe BofA really is in a lot of trouble or it is screamingly cheap. Its market capitalisation is now $155bn less than its last quarterly reported book equity value, and $135bn less than its tangible book value at the end of 2010. The latter is equivalent to the size of BofA’s entire home equity portfolio or half of its outstanding residential mortgage book.
Certainly, BofA’s tier one capital ratio is about a percentage point and a half lighter than the 7 per cent average for its peers on a Basel III basis. Via asset sales, earnings and fiddling with the denominator, analysts at Citigroup think it can add up to 150 basis points to this in the next 18 months. But the economy and house prices need to recover. Indeed, a resurgence in US consumer fortunes should result in BofA stock soaring. If not, it all comes back to those unknowable asset prices. Worryingly, the same must be said for all the banks.
E-mail the Lex team in confidence at email@example.com
Get alerts on Bank of America Corp when a new story is published