Thursday, July 8, 2010

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Analyst Blog

BofA Completes First Republic Sale

By: Zacks Equity Research

July 06, 2010


On Thursday, Bank of America Corporation (BAC - Analyst Report) announced the completion of sale of its First Republic Bank to a group of investors led by Colony Financial Inc. (CLNY) and General Atlantic LCC.

BofA accomplished the sale with $1.86 billion of new equity capital from the group of investors. The new capital was partly utilized to meet the regulatory capital requirement.

In October 2009, BofA announced the sell-off of First Republic to a consortium of investors. As a part of the deal, Colony Capital and General Atlantic now own slightly less than 50% of First Republic. Moreover, the other group of investors, including First Republic’s chairman, James H. Herbert, and chief operating officer (CFO), Katherine August-deWilde, hold a portion of the newly independent bank and operate it.

Colony Capital, a real estate finance and investment company, is mainly focused on acquiring, originating and managing a diversified portfolio of real estate-related debt instruments. As a leading global growth equity firm, General Atlantic provides capital and strategic support to private and public companies across the world.

First Republic, founded in 1985, was a publicly traded company before its takeover by Merrill Lynch in September 2007 for $1.8 billion. Merrill Lynch did not integrate First Republic and operated it as separate unit. When BofA acquired Merrill Lynch in early 2009, the company also took over First Republic.

First Republic and its affiliated companies provide private business banking, private banking and private wealth management, including investment, trust and brokerage services, carrying out client-based service through its offices worldwide.

At the time when BofA had announced the sale of First Republic, it was trying to raise money to pay back about $45 billion of government aid. As part of its same fund raising effort, in September 2009, the company sold Columbia Management, its asset management unit, to Ameriprise Financial Inc. (AMP - Analyst Report) for approximately $1 billion.

BofA’s sale of First Republic is an integral part of the company’s strategy to streamline its operations, strengthen capital and restore confidence of the U.S. regulators that the company has further growth potential. BofA will likely remain unruffled by the sale as it had not integrated First Republic with its operations.

Though there remain concerns regarding BofA’s inconsistent credit quality and net interest yield compression, we anticipate continued synergies from its large scale operations and balance sheet restructuring. This justifies the company’s Zacks #3 Rank (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market in the near term. Hence, we maintain our Neutral recommendation on the stock.