Investors have dumped Bank of America, driving its share price to a near three-year low and raising fresh worries over the state of the second-largest US bank by assets.
The bank’s shares are trading at about 38 per cent of tangible book value, meaning investors either do not believe the value of BofA’s assets or fear the company is understating its liabilities, analysts said.
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“They have what investors abhor, which is a large, unknown risk: litigation,” said Jefferson Harralson, US bank analyst at Keefe, Bruyette & Woods. “It’s hard to have a lot of confidence.”
BofA shares closed 4 per cent lower on Monday at $4.99, their lowest level since March 2009. The stock has plummeted 63 per cent this year, more than rivals JPMorgan Chase, Citigroup and Wells Fargo, as concerns over falling US home prices and unknown mortgage liabilities from the bank’s purchase of Countrywide Financial continue to haunt BofA more than two years after the recession officially ended.
Mr Harralson said BofA’s share price broke through a “bad psychological barrier” by closing below $5. Jeffrey Harte, an analyst with Sandler O’Neill, said the bank should not be trading at such a low figure, but questioned whether investors will be able to continue sticking with the bank.
“For BofA, say you have a newborn and you’re setting up his college fund. That investment will pay off pretty well,” Mr Harte said. “But most institutional investors don’t have that kind of time.”
He added that some funds could become forced sellers of BofA shares due to pressure from clients and fund consultants, leading to further declines.
BofA has been shedding assets and raising capital to placate investors. At the end of the third quarter, the bank had a tangible common equity ratio of nearly 6.3 per cent, or more than double its 2008 level.
The bank will have to raise more in order to meet new global standards, further worrying investors fearful that the bank will dilute shareholders by issuing more equity.
Mr Harte believes BofA will meet the new requirements, but through reducing its balance sheet and maintaining profit levels. Otherwise, investors will not be so keen on snapping up new BofA shares, he added. “Could they realistically go out and raise capital? I’m not so sure capital will be available.”