Wednesday, March 11, 2009

Bank of America may get by without big asset sales

Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) has put a private bank it inherited from Merrill Lynch & Co on the block, and the largest U.S. bank may try to sell other assets as well.

But unlike rival Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), which is planning a radical overhaul, Bank of America may not need capital so badly that it has to swallow hard and sell key assets it would rather keep, industry experts said. That may be just as well, given the dearth of buyers and difficulty of getting financing.

"I haven't got the impression that they're close to doing much of anything of a reasonable size," said Jeff Harte, an analyst at Sandler O'Neill & Partners LP.

Since Citigroup last month received a second government bailout, Bank of America has tried to fend off investor fears that it could be next to need more help.

Bank of America has taken $45 billion from the government's $700 billion Troubled Asset Relief Program, including $20 billion in a January bailout that also included the government sharing in losses on some toxic assets, mainly at Merrill. Its stock has fallen about 67 percent since the start of the year.

Last month an industry banker told Reuters that Bank of America was trying to sell First Republic Bank, which Merrill bought in 2007 for $1.8 billion. The banker did not want to be identified because the sale process is private.

Were Bank of America to need more capital, it could try to dispose of other assets such as its 16.6 percent stake in China Construction Bank Corp (601939.SS: Quote, Profile, Research, Stock Buzz) and a nearly 50 percent interest in asset manager BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz), or businesses such as asset manager Columbia Management, experts said.

Bank of America sold part of its Construction Bank shares in January for $2.83 billion, and has said it plans to sell more when a lock-up period expires in August 2010 -- but not sooner. Its stake is worth about $19 billion now.

BlackRock has a market value of around $12 billion. Columbia Management, meanwhile, said it had $386.4 billion in assets under management as of December 31. That could make it worth $7.7 billion, assuming a price of 2 percent of managed assets, which one analyst said could be used as a ballpark estimate.

Getting rid of some or all of those holdings would stop short of a true restructuring involving the offloading of capital-heavy businesses such as mortgage lender Countrywide Financial Corp and credit card issuer MBNA Corp, said Seamus McMahon, a partner in Booz & Co's banking practice.

Shedding First Republic may simply be an effort to dispose of non-core businesses rather than a bid to raise capital, he said.

"If they really want to restructure, they have got to get major lending businesses off their books," McMahon said. "This is housekeeping."

Bank of America declined to comment.

DISTANCE FROM CITI

The bank has tried to demonstrate that its financial health is better than that of Citigroup, which said in January that it will split into two operating units, selling or winding down non-core assets.

Citigroup also agreed to give a controlling stake in its Smith Barney brokerage to Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) for an initial $2.7 billion payment. Morgan Stanley may take over the entire business after five years.

"Bank of America is in reasonably good condition with a strong capital base and a very positive cash flow," said Richard Bove, an analyst at Rochdale Securities. "If you believe that to be the case, there's no reason for them to do asset sales."

Still, one analyst said Bank of America may need more capital to absorb credit-related losses tied to Countrywide and Merrill.

"They have a better franchise than Citi relative to the deposit base," said Paul Miller, an analyst at FBR Capital Markets. "But they are very weak on their capital levels and they took on portfolios -- Merrill Lynch, Countrywide -- that are going to cause some problems.

"I think you're going to see more and more sales of other things throughout these next weeks," Miller added.

Unfortunately, market conditions may leave Bank of America facing the same difficulty selling assets that other financial companies, including Citigroup and the insurer American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), are having.

Indeed First Republic, also a specialist in luxury home lending, may fetch a lower price than the $1.8 billion Merrill paid, experts said.

"You can justify a full price for that entity," said New York-based Park Avenue Bank Chairman Donald Glascoff, who has an expertise in real estate finance and mortgage securitization. "But I think the markets are so roiled that to find somebody who will pay a full price will be difficult."

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