BofA Transferring Derivatives to UK

According to a Financial Times report, Bank of America Corporation (BAC - Analyst Report) has started transferring its derivatives operation worth more than $50 billion from Ireland to its UK subsidiary. The move is a part of BofA’s restructuring initiative to improve overall efficiency and focus on core operations.

Financial regulators of both Ireland and UK are enthusiastic about such a shift. While Dublin-based regulators are wary of the presence of huge derivatives operations in the country, which are posing a threat to its tax payers, regulators in UK want to have a strong regulatory control over BofA’s European operations.

This move would facilitate BofA to benefit from tax breaks arising from the accumulated losses in UK operations. Earlier, many financial firms routed European operations through Dublin as Ireland offered significantly low corporate tax rate. However, this tax rate advantage is gradually loosing ground as UK has been lowering the same. Additionally, another tax rate cut to 23% from the present 24% is expected in April.

Further, as per the company’s latest disclosures, BofA has more than $8 billion of deferred tax assets (DTAs) in UK. The company can offset profit to lower or totally eradicate its corporate tax bill from these DTAs. Also, there is additional pressure on BofA to fully utilize DTAs as these will not qualify as core capital under the still-to-be-implemented Basel III capital regulations.

The process of this reallocation is expected to be completed by the end of this year. Yet, these are subject to regulatory approval and the amendment of client contracts. BofA will continue to have its corporate banking and cash management businesses in Ireland.

Over the last two years, BofA has eliminated or divested many of its non-core/unprofitable businesses across the globe. This enabled the company to stabilize balance sheet and strengthen the capital ratios. Further, the company’s non-interest expenses have declined nearly 6.5% year over year to $72.1 billion in 2012.

Apart from BofA, many other global banks including HSBC Holdings plc (HBC - Analyst Report), Deutsche Bank AG (DB - Snapshot Report) and Credit Suisse Group (CS - Snapshot Report) are also restructuring operations across the globe in order to contain costs.

Currently, BofA retains Zacks Rank #3 (Hold).