Stock Market Predictions

Bank of America shares fall after stock swap plan

Stock Market Predictions

The decline in the bank's stock on Friday was deeper than the broader market and the 1.5 percent decline in the KBW Bank Index .BKX. The shares closed at $6.49, down 51 percent for the year.

Bank of America said in a filing Thursday that the stock swap it was exploring was "economically advantageous" because of the lowered market value of the bank's preferred shares. But issuing up to 400 million common shares would dilute the holdings of other shareholders.

"We believe this is purely a financial engineering tactic to enrich BAC's capital base in an earnings per share neutral transaction," Guggenheim Partners analyst Marty Mosby said in a research report Friday. "However, we also believe investors are in no mood to give any bank management team the benefit of the doubt and will likely sell shares on this news."

Bank of America CEO Brian Moynihan has repeatedly said the bank does not need to issue common stock to cover mortgage losses or meet new international standards. A bank spokesman said the move should be viewed as a swap that leaves the company with more common stock, which is viewed more favorably by regulators.

The exchange would reduce Bank of America's book value by 2 to 3 percent and increase its Tier 1 common capital ratio by about 20 basis points to about 8.8 percent, CLSA analyst Mike Mayo wrote in a note to clients.

"An increase in common equity is probably a necessary step given unresolved mortgage-related issues, the Fed's unwillingness to grant a dividend increase in (the second half of 2011), and a Tier 1 common ratio that is lower than peer," Mayo wrote. "However, this also reflects poorly on management who were previously adamant that BAC did not need to raise any additional common capital."

(Reporting by Rick Rothacker in Charlotte, North Carolina; Editing by Richard Chang)