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1 Chart Shows Why Bank of America Will Increase Its Dividend Next Week

By John Maxfield - Mar 19, 2014 at 12:00PM

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It will cost Bank of America roughly $420 million a year to double its dividend, which equates to less than 1% of its excess capital.

It's hard to fathom that Bank of America ( BAC -2.27% ) won't get approval to increase its dividend when the results of this year's Comprehensive Capital Analysis and Review process are released by the Federal Reserve next Wednesday.

Lest there be any doubt, however, take a look at the following chart.

This illustrates three iterations of Bank of America's Basel III Tier 1 common capital, which is the main metric used by the Fed to determine if a bank can increase capital distributions to shareholders.

The far left is the bank's current Tier 1 common capital, which totals up to $132.3 billion for a Tier 1 common capital ratio of 9.96%. Importantly, Bank of America needs to hold only $66.5 billion of this to satisfy its minimum CCAR requirement of a 5% Tier 1 common capital ratio. This is why I denoted $65.8 billion of it as "excess."

The middle column is the same breakdown for 2013, which totaled up to $128.6 billion for a Tier 1 common capital ratio of 9.25%. As you can see, the allocation is slightly different, with a higher minimum threshold ($69.5 billion) and a smaller amount of excess capital ($59.1 billion).

Finally, the column on the right shows what happened to Bank of America's 2013 capital base after it passed through last year's CCAR stress tests. Under the hypothetical scenario, regulators calculated that the bank would've written off $44.6 billion in Tier 1 common capital, leaving only $14.5 billion in excess of the 5% threshold.

To tie this all together, in turn, let's assume Bank of America's excess capital is reduced by an analogous amount in this year's CCAR process -- that is, by $44.6 billion. That would leave the bank with somewhere in the neighborhood of $21.2 billion in excess capital lying fallow on its balance sheet.

Thus, when you consider that it will only cost Bank of America $420 million a year to double its common-stock dividend, it's almost unconscionable to conclude it would either voluntarily or be forced by the Fed to pass up the opportunity to do so.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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