Did B of A Crumble Under the Stress Tests?

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Investors anticipating a bombshell stemming from this evening's Federal Reserve annual big bank stress results may be disappointed and have to look toward next week.

Any surprises?
As expected, after continually purging its books of legacy issues, Bank of America (NYSE: BAC  ) posted stronger capital ratios under the test's "severely adverse scenario," which included a rosier U.S. economic climate, but a more substantial slowdown in Asia compared to last year. Somewhat surprisingly, Citigroup's (NYSE: C  ) stressed Tier 1 common capital ratio of 8.3% fared better than the two banks with sterling reputations, Wells Fargo and JPMorgan Chase.

Making progress
Last year, Brian Moynihan led the bank into the stress test season with a Q3 2011 Tier 1 common ratio of 8.7%, which crumbled to a low of 5.7% under last year's economic downturn scenario. B of A spent the majority of 2012 cleansing its balance sheet of non-core, risky assets, and continually showed improved capital ratios quarter over quarter. This evening, stress test results revealed B of A's Tier 1 common ratio climbed to 11.4% in the third quarter of 2012, but the ratio shrunk to 6.8% under the hypothetical economic downturn. Although an improvement of roughly 110 basis points may seem insignificant, the test results validated Moynihan's mission to return to this year's tests as a stronger bank.

Shall we toast to victory?
Despite B of A's small victory this evening, Moynihan and his management team are not toasting to each other's success quite yet. While Bank of America's overall projected loan losses during this year's nine quarter window were 18% lower than the previous stress tests, potential losses from first-lien mortgages and credit cards portfolios remained elevated. Citigroup saw its loan loss estimate decline at a slightly faster rate than B of A.

Tipping its hand
While investors will surely dive deeper into the individual performances of each bank, the primary focus of the investment world remains on any changes to the institutions' capital plans, which will receive public approval or rejection next Thursday from the Fed. However, investors may not have to wait the full week to learn the intentions of Wall Street's biggest players. After the closing bell, Citigroup announced its plans to keep its quarterly dividend at a paltry $0.01. Given B of A's relative performance to Citigroup in the stress test results, investors in the Charlotte-based bank expecting an enormous increase in dividend payouts would be wise to temper their expectations.

The Dodd-Frank stress results are just one method of examining the B of A's enormous balance sheet. With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy, and three reasons to sell. Click here now to claim your copy.

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