Bank of America – Regulatory Challenges and Berkshire Hathaway’s Divestment Impact
Recommendation: SELL
- Target Price: Not Provided
- Broker Company: Lim & Tan Securities
- Date of Recommendation: September 2024
Investment Thesis:
Bank of America (BAC) is facing increased regulatory pressure as the US Federal Reserve and other regulators prepare to unveil significant changes to capital rules under Basel III Endgame. These regulations are expected to increase capital requirements for banks, particularly in areas such as fee-based, non-interest business lines, like wealth management and certain credit-card operations.
Berkshire Hathaway, Bank of America’s largest shareholder with an 11.1% stake, has been gradually reducing its exposure to the bank. Since mid-July 2024, Berkshire has sold shares worth approximately USD 7 billion, including 18.7 million shares between September 3 and September 5, 2024, generating USD 760 million. This consistent selling pressure, combined with regulatory concerns, has contributed to the weakness in Bank of America’s stock.
Key Concerns:
- Increased Capital Requirements: New regulations, including a reduction in the capital that banks must allocate for non-interest business lines and changes to operational-risk provisions, are expected to dampen the profitability of major banks like Bank of America.
- Berkshire Hathaway’s Divestment: The sale of BAC shares by Warren Buffett’s Berkshire Hathaway signals caution and reduces investor confidence, especially amidst rising regulatory scrutiny.
- Sector Impact: News of these regulatory changes and Berkshire’s continued divestment has negatively impacted the broader banking sector, with downside risks expected to persist.
Conclusion:
With increasing regulatory challenges, investor sentiment surrounding Bank of America remains cautious. The continuous sale of shares by Berkshire Hathaway reflects broader concerns about the sector’s ability to generate returns under the new regulatory environment. Therefore, a SELL recommendation has been issued for BAC until there is more clarity on how these regulatory changes will impact the bank’s financials.
Thank you
