BofA to De-TARP in Installments

The Chief Financial Officer (CFO) of Bank of America Corporation (BAC - Analyst Report) said Tuesday that the bank is expected to repay the bailout money it has received from the government in relation to its participation in the Troubled Asset Relief Program (TARP) in installments.

The government is also pushing the bank to pay at least $500 million to conclude a tentative pact in which the government agreed to share losses on certain BofA assets.

The installment payments would enable BofA to gradually reduce government involvement in its affairs.

However, unlike the other banks, BofA does not intend to repay its entire $45 billion support from the TARP in lump sum, as it has faced mounting loan losses as more customers default. But it may start with the repayment of $20 billion, which it received as part of the total aid to absorb loss-making investment bank Merrill Lynch & Co.

During an investor presentation, CFO Joe Price said that the bank is also taking steps to reduce or eliminate its reliance on other government lending and support programs that were placed during the height of the credit crisis to help stabilize financial markets.

Some large financial firms that have already repaid government fund are JPMorgan Chase & Company (JPM - Analyst Report), Morgan Stanley (MS - Analyst Report), Bank of New York Mellon Corporation (BK - Analyst Report), Goldman Sachs (GS - Analyst Report), U.S. Bancorp (USB - Analyst Report), American Express Company (AXP - Analyst Report), BB&T Corporation (BBT - Analyst Report) and State Street Corporation (STT - Analyst Report).

The repayment of government money can be viewed as a sign of recovery of the institutions as well as the economy. Also, the full repayment of government money has enabled these firms to protect their executive compensation packages. Restrictions on pay rules as a result of absorbing government money were a major competitive disadvantage for these firms in retaining talented employees.

We think that Bank of America is in a relatively good shape from a capital perspective. During this delicate period of market stress, the availability of significant private-sector capital is very limited. As a result, the management remains focused on managing asset-levels efficiently, ensuring the deployment of TARP funds to core lending businesses and trimming other assets in non-core businesses.

We think that the management is quite confident about its capital position as it has indicated to pay back TARP funds in installments.

We anticipate continued synergies from the company’s large scale operation and balance sheet restructuring, but higher credit costs and worsening credit quality will be a drag on upcoming results. Therefore, we are recommending the shares as Neutral.

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