A government rescue plan has eased investors’ concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including Bank of America Corp could still tempt short-sellers.
Bank of America, the No. 3 U.S. bank by assets, has loaded up on mortgages as the world’s largest economy wrestles with the worst housing market since the Great Depression.
The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial Corp, the largest U.S. independent mortgage lender and agreeing to buy Merrill Lynch & Co, which owns the world’s largest retail brokerage.
If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels.
“I would expect there are more banks who are in dire straits and more who can expect to be helped,” said Michael Farr, president of investment management company Farr, Miller & Washington in Washington, D.C. “The share price makes it look like Bank of America might be next in line,” he said.
Before Monday’s stock market rally, Bank of America shares had lost 52 percent in November alone, making them the second biggest decliner for the month in the KBW Banks index after Citigroup.
Analysts at independent research company CreditSights forecast that in a scenario where the commercial and residential real estate markets really tank beyond banks’ expectations, Bank of America would have a Tier-1 capital ratio of 7.15 percent.
The minimum that regulators seek to consider a bank “well capitalized” is 6 percent, but any ratio near or below 7 percent tends to spook investors.