Updated Aug. 6, 2014 1:29 p.m. ET
Bank of America Corp. BAC +1.33% Bank of America Corp. U.S.: NYSE $15.20 +0.20 +1.33% Aug. 6, 2014 4:00 pm Volume (Delayed 15m) : 93.41M AFTER HOURS $15.22 +0.02 +0.13% Aug. 6, 2014 4:46 pm Volume (Delayed 15m) : 1.24M P/E Ratio 23.38 Market Cap $158.26 Billion Dividend Yield 0.26% Rev. per Employee $391,153 08/06/14 Bank of America Near $16 Billi... 08/06/14 BofA to Raise Dividend for Fir... 08/06/14 HEARD ON THE STREET: BofA Serv... More quote details and news » will raise its quarterly dividend above a penny for the first time in more than five years after getting a green light from the Federal Reserve, a milestone in its recovery from the financial crisis.
The bank said Wednesday that it would raise its dividend to 5 cents a share from 1 cent, after the Fed said that it wouldn't object. But the bank scrapped its previous request for a $4 billion buyback. Bank of America had received permission in March for the 5-cent dividend and $4 billion share buyback, as part of the Fed's annual stress tests of large banks, but it was forced to submit a new plan after announcing in April that it had discovered errors in the way it calculated regulatory capital levels.
The Fed's approval comes as a relief for the bank at a time when the industry is under heightened scrutiny. The Fed and Federal Deposit Insurance Corp. flexed their muscles on Tuesday, telling 11 of the biggest banks, including Bank of America, that they need to improve their so-called living wills, which are meant to describe how a bank would wind itself down in an orderly fashion during another financial crisis.
Raising the dividend is a big move for Bank of America Chief Executive Brian Moynihan, who has been preaching patience to shareholders as the bank slims down and pays billions of dollars in legal settlements from the mortgage crisis. The bank last raised its quarterly dividend in 2007, to 64 cents from 56 cents.
Bank of America has been forced to pay shareholders only a token 1-cent dividend since it took bailout loans in the financial crisis, even as many big rivals already moved on to paying higher dividends. The bank said in a statement that the Fed's approval "reflects the significant progress the company has made to strengthen the balance sheet and build capital and liquidity." It is also a vindication for Mr. Moynihan, who three years ago publicly hinted at a dividend increase that the Fed later rejected.
To be sure, the bank is still tangling with regulators and the government in other areas. It is in the midst of negotiating a settlement over mortgage securities with the Justice Department, which could cost the bank at least $13 billion in cash and consumer assistance.
The approval of Bank of America's new capital plan means that the bank's capital ratios again pass the Fed's minimum requirements, though its projected capital levels are lower than most rivals. The Fed said Bank of America would have a 5.4% Tier 1 common capital ratio in a severe recession with its new plan, compared with 5.3% in its previous plan that included both the buyback and dividend. The Fed's minimum requirement is 5%.
The bank's decision to again ask for the full 5-cent dividend illustrated the difficult juxtaposition the bank has to navigate as it seeks to please both shareholders and regulators.
Other banks that ran into stress-test problems this spring, including Citigroup Inc. C +0.52% Citigroup Inc. U.S.: NYSE $48.14 +0.25 +0.52% Aug. 6, 2014 4:00 pm Volume (Delayed 15m) : 12.92M AFTER HOURS $48.11 -0.03 -0.06% Aug. 6, 2014 4:46 pm Volume (Delayed 15m) : 71,649 P/E Ratio 15.78 Market Cap $145.19 Billion Dividend Yield 0.08% Rev. per Employee $349,582 08/06/14 Bank of America Near $16 Billi... 08/06/14 Unlock the Potential of Japan'... 08/05/14 U.S. Tells Big Banks to Rewrit... More quote details and news » and the U.S. units of Banco Santander SA and Royal Bank of Scotland Group PLC, have opted to wait until January to submit new capital plans. Citigroup has said it wants to take the time "to really get things right."
The Fed last month approved a resubmitted capital plan from Zions Bancorp, which included no dividend increase. The Fed rejected Zions' original plan for quantitative reasons, because one of the bank's capital ratios fell below the Fed's minimum.
Bank of America said it would start paying out its new 5-cent dividend on Sept. 26, a move that will cost the bank an extra $1.7 billion a year. Some analysts had said that keeping the 5-cent dividend, and scrapping the $4 billion buyback, made sense because the capital error was worth about $4 billion.
The bank hasn't disclosed exactly how the capital error was discovered, or who was responsible for it. After announcing the error, the bank conducted an internal review and hired an accounting firm—identified as KPMG LLP by people familiar with the matter—to review how it reports and calculates regulatory capital ratios. The bank has said the accounting firm found no significant issues. A spokesman on Wednesday declined to comment on the specifics of the internal review.
Write to Christina Rexrode at christina.rexrode@wsj.com
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