BofA Plans To Offload Risky Margin Loans Post Steinhoff Loss

Per a Bloomberg report, Bank of America Corporation (NYSE:BAC) (NYSE:C) is looking out for rival lenders in the industry in order to sell them some of its high-risk margin loans. According to people familiar with the matter, BofA wants to get rid of such loans and is primarily focusing on the non-recourse, single-stock margin loans that are considered to be the riskiest amongst the lot.

Margin lending is an arrangement in which individuals or corporate borrowers, in order to finance certain investments, can take loans by keeping a portfolio of cash, shares, derivatives or any other market-traded asset as collateral.

While all margin loans are considered risky, the non-recourse, single-stock margin loans are the riskiest as they are backed by the shares of only one company and not by a mix of securities. Thus, in such cases, even if the value of the stock that has been used as collateral plunges, the lender cannot claim any other asset of the borrower and is forced to hold the stock that might be worth only a fraction of its former value.

BofA’s decision to offload such loans comes after it lost almost $292 million last quarter on margin loans that it provided to Christo Wiese, the former chairman of Steinhoff International Holdings NV.

Steinhoff International is a retail company in South African that deals mainly in furniture and household goods.

In September 2016, BofA, along with some other companies like JPMorgan (NYSE:JPM) , Citigroup (NYSE:C) , The Goldman Sachs Group, Inc. (NYSE:GS) and a few more, had collectively given more than €1 billion of margin loans to Wiese, for which he had kept 628 million of Steinhoff shares as collateral.

However, on Dec 5, 2017, Steinhoff informed that it discovered some accounting irregularities due to which shares of the company lost nearly 90% that month.

Having no recourse option other than liquidating the stock, these banks had to write off the margin loan and debts. Since the banks had billions of exposure toward Steinhoff shares at that time, they had to suffer huge losses that were recorded in their fourth-quarter 2017 results.

However, BofA’s move to offload these loans to its rival firms might pose some risks as banks generally use such loans to deepen their relationships with existing major clients. In fact, margin loans are often believed to provide compensation for the risks involved and hence are considered profitable in equity trading desks.

Shares of BofA have gained 39.4% in the past year, outperforming 21.6% growth of its industry.

Currently, BofA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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