Bank of America’s Big Day

Yesterday, the Federal Reserve made two seemingly innocuous scheduling announcements that are anything but for the nation's second largest bank by assets, Bank of America (NYSE: BAC  ) .

First, the Fed will release the results of the 2013 stress tests on March 7. And second, one week later, on March 14, it will release the results from the Comprehensive Capital Analysis and Review, an annual exercise by the central bank to "help assess whether the largest bank holding companies have sufficient capital to continue operations during the upcoming two-year period assuming economic and financial stress."

B of A's own March madness
This is critical for B of A, because the latter round of results will dictate whether it can up its dividend payout or initiate a share repurchase program -- either of which would serve as a potent catalyst for the bank's underlying share price.

In 2011, as many of you likely recall, B of A's request to do so was denied by the Fed. Analysts postulated at the time that regulators were concerned about the bank's mortgage business, which was plagued by mounting credit losses and billions of dollars in legal liability stemming from its near-apocalyptic acquisition of Countrywide Financial.

Given the resulting humiliation, as competitors like JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) were given the go-ahead to increase distributions to shareholders, B of A chose to bide its time last year and forego making a similar request.

While CEO Brian Moynihan has refused to admit that the bank requested approval to return more capital to shareholders this go-around, I suspect that he did. I also believe the request will be approved.

Since having its 2011 request publicly and humiliatingly denied, B of A has focused steadfastly on increasing its capital base -- the gravamen of both stress test rounds. At the end of 2010, its Basel I Tier 1 common capital ratio stood at 8.6%. By the end of last year, it had grown to 11.06%.

Measured under the new Basel III regulations, which don't take full effect until 2019, B of A's Tier 1 common capital ratio of 9.25% is the highest among its too-big-to-fail competitors -- JPMorgan's comes in at 8.7%, Wells Fargo's at 8.18%, and Citigroup's (NYSE: C  ) at 8.7%.

By my calculations, in turn, B of A now has upwards of $10.4 billion in accumulated capital beyond its regulatory minimum. That equates to $1 per share that's ripe for distribution -- though, at best, B of A would probably no more than quadruple its current quarterly payout of $0.01 per share.

Looking past static capital levels, B of A has similarly made considerable progress over the last two years in resolving the legal uncertainty associated with its loathsome Countrywide acquisition -- click here to see how this has added up to more than $40 billion thus far. In two separate multibillion-dollar settlements with state governments and federal regulators, B of A resolved the lion's share of its liability for faulty mortgage servicing practices.

The bank has also chipped away at its liability for the origination and sale of defective mortgages by Countrywide to public and private investors prior to the financial crisis. Through two settlements with Fannie Mae and one with Freddie Mac, B of A's contractual liability has effectively been eliminated. And as I write, a massive $8.5 billion settlement clearing up roughly half of its liability to private investors is pending approval by a judge in New York.

Taken together, then, with the improvement in capital levels and the reduction in legal uncertainty, there remain fewer and fewer reasons for the Fed to deny B of A's presumed request. And, when the approval comes, as I said above, you can be assured that the bank's share price will respond in kind.

Banks and dividends
Suffice it to say, B of A at present is far from a dividend play -- though, to be fair, its 0.3% yield is triple that of Citigroup's 0.1% yield. The better bets in this regard are JPMorgan and Wells Fargo, both of which yield approximately 2.5%. In addition, as I discussed here, Wells Fargo was recently given the green light to increase its quarterly payout.

Instead, B of A's shares provide massive upside potential that arguably isn't present at any of the other too-big-to-fail banks. As our senior banking analyst Anand Chokkavelu estimates, that could equate to a "double or triple over the next five years." To see why Anand thinks this could happen, download his in-depth report on B of A by clicking here now


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