BofA CEO’s Pension in Question

U.S. pay czar Kenneth Feinberg has been advised by a top U.S. labor group on Thursday to stop the retirement payments to Bank of America Corporation’s (BAC - Analyst Report) Chief Executive Ken Lewis, who will leave the company by the end of this year.

In a letter, the Service Employees International Union said that the pay czar should not allow Lewis to receive any retirement or severance package until the bank stops foreclosures and increases lending. Bank of America has already received $200 billion in taxpayers’ money as bailouts.

BofA has been one of the largest beneficiaries of the federal bailout program, receiving $45 billion from a total of $700 billion. The company faces many lawsuits and investigations by lawmakers and regulators over the Merrill Lynch acquisition, which has made it the largest U.S. bank. Lewis faces possible legal problems over BofA’s acquisition of Merrill Lynch & Co.

A proposed $118 billion of taxpayer funds was aided to share losses on the bank's purchase of Merrill Lynch. On Sept. 21, 2009 the company agreed to pay $425 million to exit the preliminary term sheet.

The BofA CEO’s retirement pay includes $53.2 million in pension, which was frozen previously, and $72.8 million in accumulated stock and other compensation. However, the government's pay czar does not necessarily have explicit authority over Lewis' division package because the contract may pre-date his authority.

We think that BofA 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 Troubled Asset Relief Program (TARP) funds to core lending businesses and trimming other assets in non-core businesses.

Also, the management is quite confident about its capital position as it has indicated paying back TARP funds in installments.

We anticipate continued synergies from the company’s large scale operation and balance sheet restructuring. However, higher credit costs, various legal issues and worsening credit quality will be a drag on BofA’s upcoming results. As such, we maintain a Neutral recommendation on the stock.

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