BofA to Pay TARP Dividends

Bank of America Corporation (BAC - Analyst Report) said on Friday that it will pay $713 million in dividends on preferred stock issued to the Treasury Department in relation to its participation in the Troubled Asset Relief Program (TARP) last year.

Through the end of September, the bank has already paid $1.83 billion in TARP dividends to the government. The fourth-quarter dividends will be paid on Nov. 16.

As part of the government’s $700 billion TARP to provide liquidity to the credit markets, BofA received $45 billion worth of government funds through two separate steps. The bank received $25 billion as part of the initial round of investments and $20 billion in January shortly after its controversial acquisition of Merrill Lynch. The bank has not yet repaid any of the principal money.

This news comes after BofA said earlier that it is in a position to begin repaying the bailout money. 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. The bank expects to repay the bailout money in installments.

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

Some large financial firms that have already repaid government funds 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 while retaining talented employees.

We think that Bank of America is in a relatively good shape from a capital perspective. During this vulnerable 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 of the Bank of America 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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