Bank of America: Shoring up Capital Base for Stress Test

Bank of America Corp. (NYSE:BAC) completed its swap of common stock and notes for preferred shares as part of its efforts strengthen its capital base ahead of Fed's 2012 stress test.

Under the arrangement, Bank of America, or BofA, issued 400 million shares of common stock and $2.3 billion of senior debt for $5.8 billion of preferred stock and trust preferreds.

BofA estimates it has increased Basel I capital by 59 basis points (bps) in the fourth quarter through this swap and sales of China Construction Bank (CCB) stake and the Canadian card portfolio.

"We project the increase is 27 bps on a Basel III basis due to a smaller benefit from the CCB sale. We view these transactions as an indication that Basel I remain in focus for BofA heading into the Fed's 2012 stress test. Further, the potential for additional dilution remains a serious risk, in our view," UBS analyst Brennan Hawken wrote in a note to clients.

Hawken expects the swap would be about 1 percent dilutive to 2012 earnings per share, increasing slightly in future years as BofA's earnings power improves.

Meanwhile, BofA is exposed to outsized losses in its troubled mortgage business, is aggressively looking to lower risk-weighted assets, and is struggling to contain costs in this challenging environment.

"Until BofA is able to address its peer-trailing Basel III capital ratios, we believe shares will remain under pressure," said Hawken, who has a "neutral" rating and $6 price target BofA stock.

Shares of BofA closed Tuesday's regular trading session at $5.17 on the New York Stock Exchange.