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Bank of America's $5B repurchase plan capitalizes on unexpected capital

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Bank of America's $5B repurchase plan capitalizes on unexpected capital

Bank of America Corp.'s plan to repurchase up to $5 billion in common stock was an opportunity that fell outside of its annual stress tests and demonstrates that regulators are increasingly allowing excess capital to move outside the bank, according to comments from Chairman and CEO Brian Moynihan at Goldman Sachs Financial Services Conference on Dec. 5.

Earlier in the day, the bank announced that it is repurchasing $5 billion in common stock, on top of the $12 billion previously authorized, following approval from the Federal Reserve. Moynihan said this off-cycle request stems from several developments that the bank could not have anticipated when it made its capital return request as part of the recent Comprehensive Capital Analysis and Review: the added regulatory capital from Berkshire Hathaway Inc.'s exercise of warrants and the sale of the bank's non-U.S. consumer credit card business. He called the approval "good news" and said the development should "comfort" investors that excess capital is allowed to move out of overcapitalized banks.

Outside of the off-cycle request, Moynihan said the bank will continue to drive down its Tier 1 common capital ratio, which ended the third quarter at 11.88%, through the annual stress-test exercise. He said the bank will push the dividend, which is currently in a 20% range, into the 30% range. The rest of the capital will be earmarked for stock repurchases, given the 3 billion to 4 billion in shares the bank issued throughout the crisis. He said the bank has repurchased about 1 billion in shares so far.

"You can do a lot of math but with where our book value is and where we're trading, we'll always be within a range that I think is perfectly acceptable to buy the stock back," he said. "Right now, I think it's the best thing to knock the share count down and get ourselves back in that long-term operating position."

He pointed out that the bank's "enterprise value" is high, given its market capitalization is more than $300 billion even with a share price below $30. He added that even with the repurchase activities, the bank is well-capitalized to protect its dividend when another crisis hits.

Moynihan also touched briefly on tax reform, given that Congress is gearing up to hash out differences between plans from the Senate and House of Representatives. He reaffirmed that the bank would benefit because it currently pays a lot of taxes, even if it will need to readjust the value of its deferred tax asset and lose FDIC-assessment deductions.

"It's good for corporate America and it's good for us. We'll get a better benefit by the long-term economic impact because it means more business and that will be the important benefit going forward," he said. "If the economy is stronger in the U.S. and around the world, that's good for our company and competitors."

Moynihan also said that trading revenue at the bank could fall about 15% in the fourth quarter compared to a year ago.