UPDATE 2-Bank of America, Wells Fargo need more equity - analyst
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Dec 10 (Reuters) - Banking giants Bank of America Corp (BAC.N: Cotización) and Wells Fargo & Co (WFC.N: Cotización) may need to raise billions of dollars in common equity and face a high risk of a dividend cut, a banking analyst at Atlantic Equities said and downgraded both the stocks.
Analyst Richard Staite lowered his rating on Bank of America to "underweight" from "neutral" and Wells Fargo to "neutral" from "overweight."
Staite said JPMorgan Chase & Co (JPM.N: Cotización) has the strongest capital ratios -- a measure of capital strength that investors are closely watching these days -- and is the least likely of the three banks to cut its dividend or raise new equity.
He expects Bank of America and Wells Fargo to raise $15 billion and $10 billion in common equity, respectively, and said their payout ratios could exceed 100 percent in 2009.
"These payout ratios are too high and given the uncertainty of a recovery in 2010 we now think there is a high chance of a dividend cut from both Bank of America and Wells Fargo," he said.
Bank of America's acquisition of Merrill Lynch MER.N and Wells Fargo's acquisition of Wachovia Corp WB.N have hurt their tangible common equity to tangible asset ratio, thereby making equity raise necessary, Staite said.
After the acquisitions, Bank of America's tangible common equity to tangible asset ratio will fall to 3 percent, while that of Wells Fargo will fall to 2.9 percent, which are "too low", the analyst added.
Staite said capital from the U.S. Treasury's Troubled Assets Relief Program does not help tangible common equity capital ratios and that it boosts only Tier 1 capital ratio, which is not a not a "good guide" to the risk being faced by common shareholders. Continuación...