BAC must do 5 things to prove itself worthy. The first is to manage its business operations and make a profit every quarter that meets or exceeds expectations. One of the factors holding it back right now is the expense it burdens every quarter from the past financial crisis of 2007-08. The costs are decreasing every quarter, but BAC must put this behind them as it cuts into the profits and growth of the company. The financial community is seeing the beginning of the end of legal actions from the financial crisis. Bank of America and MBIA (NYSE:MBI) announced a "comprehensive settlement" that not only reduces the threat of higher payouts in court, but the awareness that the end is near. These settlements have reached a point where the tide is turning toward the future and losing steam from the negativity of law suits. These agreements only push the past further behind, and more investors looking to the future.
The second task BAC must accomplishment is making money through financial business operations, loans, credit cards, interest rates, services and reduce the perception of income through fees and charges to the customer. This is a two pronged approach of making money the old fashioned way and building a positive reputation with the public. Several occurrences in the past where BAC would create new charges that were then portrayed by the media as greedy big business. BAC must become more community friendly. This perception is best demonstrated by BP with the Gulf of Mexico oil spill that has done remarkably well with public opinion.
The third task is BAC must grow as a financial leader in the market place. BAC improved its financials in the first quarter of 2013, and must continue. Net income increased from $10.6b in the 4Q 2012 to $10.9b in the 1Q 2013. This increased the capital on hand for Basel III standards from $133.4 in 4Q 2012 to $137.5 in 1Q 2013. These number must continue to improve and with the continued reduction of the cost associated with the financial crisis will allow solid growth in these numbers. BAC must grow through investments with managed risk that encourages investors looking for safe investments with solid gains. BAC must grow revenue and manage costs to build toward a $1.00 per quarter per share for current investors and to build new investors.
The fourth task is BAC has a sizeable investment of leverage investments left from the financial crisis, but as the housing market continues to improve the value and risk associated with these may turn more profitable for the company. BAC must know when to hold and when to sell to move more riskier investments against holding them for their value. These investments have the potential to create income opportunities and increase the value of the company by billions of dollars within the next 5 years.
The fifth and last task I will highlight that has potential to effect the housing market is that the federal government still wants to force financial companies to lower the principle on mortgages down to near current valuations of the property. The biggest mortgage loan servicers, which include BAC, are required to offer principal reductions under the national mortgage foreclosure settlement. The purpose is to encourage home owners to not walk away from a home they owe more on than the value.
Laurie Goodman, a noted mortgage analyst at Amherst Securities, stated the feds must be "very careful about how the policy is implemented." The program would require tight "gating" to ensure that principal reductions would be made "only to borrowers who are still very likely to default even with some improvement in the housing market." The reason why mortgage investors and lenders are often unwilling to reduce principal on the mortgage, but are more willing to ease other terms, is because the borrower often gets the complete upside from the arrangement. He gets to lower his payment and stay in his home, while the bank takes a loss. Then when the housing market turns higher, he is able to sell his home at a price higher than the loan amount and gets to pocket the difference.
The final analysis of BAC is they have the opportunity over the next few quarters and years to increase their profitability, become a stronger financial company and compete as a market leader. Investors can look forward to increases of their stock prices and a dividend increase in possibly 2014, and for sure in 2015. The company will have to retain a strong position of cash on hand to meet the future Basel III requirements as they continue to tighten in the future. Overall, with 3 more solid quarters from BAC and earnings growing of near $0.50 per share by the end of 2013, I expect stock prices to climb to near $15.00 by end of 2013.
Disclosure: I own stock in BAC and plan to increase my holdings in the future.. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.