Deep Thoughts On Bank of America (BAC) After TARP Payback

The big news last night was the announcement by Bank of America (NYSE: BAC) that it will break clean from TARP by paying back $45 billion. BAC is raising $18.8 billion in common equivalent securities, which will convert to common shares upon shareholder approval. The rest is coming from excess liquidity. BAC also agreed to increase equity by $4 billion through asset sales agreed to raise up to approximately $1.7 billion through the issuance of restricted stock in lieu of a portion of incentive cash compensation to certain Bank of America associates as part of their normal year-end incentive payments.

Wall Street has now weighed in on the news. Most firm's agreed that the move was a positive and many think this clears the way for a replacement for CEO Lewis. Here is what they have to say:

Goldman Sachs: "Dilution is manageable: Our $2.65 normalized EPS estimate drops to $2.40 pro-forma... Thus, the capital raise is about 10% dilutive...BAC will have a 8.5% pro forma Tier 1 common ratio versus 7.5% for the industry." The firm maintains a Buy rating and $20 price target.

Deutsche Bank: "These are costly actions, but a big step in the right direction for BAC." "The net impact of repaying TARP and raising capital will be accretive near term (ex the $4.1b one-time charge in 4Q09) and we estimate 5-15% dilutive to normalized EPS (depending on previous assumptions regarding capital raises). We now estimate normalized EPS of $2.85 vs. $3.25 previously given the larger than expected capital raise; 2)TARP repayment will save BAC ~$3.6b in annual dividend costs. We estimate a $0.5b reduction in net income from asset sales (required to add another $4b of common); 3) TARP repayment will reduce net income in 4Q09 by $4.1b; 4) Pro-forma Tier 1 common increases to 8.5% from 7.3%." The firm maintained a Hold rating and $16 price target on BAC.

FBR Capital: "We view this announcement positively for several reasons: (1) BAC's TCE position increases over 100 bps, significantly improving the capital cushion for absorbing continued credit pressures; (2) full repayment of the TARP removes a significant overhang related to continued government intervention; (3) while the $20B cost of exiting the TARP was within our expected range, we believe many investors expected BAC to be required to raise the full $45B in common." The firm also said repaying the TARP could open the door for BAC to announce a new CEO, potentially before year-end. Upgraded to Outperform and raised their price target from $15 to $20.

Keefe, Bruyette and Woods: "Soon to be TARP-Free; A Bullish Event for the Shares... The TARP repay is just slightly more dilutive than our assumptions."

Wells Fargo Securities: "Though we estimate share count dilution totals about 15%, net of the elimination of TARP preferred dividends and related accretion following repayment actually generates about 4% accretion to our prior 2010 EPS estimate of $1.64. As a result of the transaction, we are increasing our 2010 EPS estimate to $1.70 while lowering our Q4 2009 EPS estimate to ($0.41) (09 goes from $0.61 to $0.10) due to the effect of a $4.1B one-time reduction in earnings available for common shares." The firm also said the repayment should also aid the search for a CEO to replace Lewis. The firm reiterated an Outperform rating and $24-$27 valuation range.

Collins Stewart: ..." that BAC was able to repay 100% of TARP at a much earlier date than anticipated represents a significant positive for the company. In addition to improving BAC's financial flexibility and strengthening the company's balance sheet, the exit from onerous governmental oversight materially reduces potential challenges in finding a successor for CEO Ken Lewis--all positives in our view." The firm maintains a Buy rating and $22 price target.

Shares of Bank of America are up 2.3% today following the news.

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