Large banking institutions don't typically create a lot of excitement among investors. After the near collapse of our financial system in 2008 and 2009, who could blame investors who decide to pass on companies in the financial sector. However, there is one bank that appears to be making all the right moves. Bank of America (BAC) is surging to two-year highs on the back of strong earnings, a lawsuit settlement, and the involvement of a major hedge fund.
Recent Earnings Report
Bank of America released its first-quarter earnings report on May 7, 2013. The results were extremely impressive. During the first quarter, Bank of America generated $23.7 billion in revenue, up about $1.2 billion from the same period a year ago. The company's net income came in at $2.6 billion, up from just $653 million for the same period in 2012. The company's performance ratios were also strong, especially ROA. For the first quarter, BAC generated an ROA of 0.27%, more than double the previous year's number of 0.12%.
Bank of America also did a solid job of maintaining its capital ratios, which are becoming of greater importance since the near financial collapse of 2008 and 2009. The first quarter's Tier 1 common capital was 10.58%, up from the 10.38% number in the previous quarter.
On the debt side, Bank of America was able to reduce its long-term debt by $75.3 billion from the year-ago quarter. This was driven primarily by maturities and liability management actions.
These results continue the upward momentum that Bank of America has been generating over the past 52 weeks. These strong results were driven by increased brokerage income, higher investment banking fees, and improved credit quality across all major portfolios.
Chief Executive Brian Moynihan said:
Our strategy of connecting our customers to all we can do for them is working. Solid increases in loan growth to small businesses and middle-market companies, four straight quarters of steady growth in mortgage originations, record earnings in wealth management, and another quarter near the top in investment banking fees show we are balanced, focused and moving forward.
While Bank of America is the best-performing bank over the past year, its closest competitors are seeing strength as well. JPMorgan (JPM), Citigroup (C), Wells Fargo (WFC), and Goldman Sachs (GS), have all soared over the past 52 weeks.
JPMorgan has returned approximately 22% over the past 52 weeks
Citigroup has returned approximately 62% over the past 52 weeks
Wells Fargo has returned approximately 18% over the past 52 weeks
Goldman Sachs has returned approximately 40% over the past 52 weeks
Clearly all of the investors in these companies are over the moon with the results these companies have generated. These impressive performances can be attributed, in part, to the recovery of the housing market. The housing market has shown marked improvements in housing prices, new home building, and housing sales. Because of these improvements, banks have benefited from the amount of new mortgage originations. Late last year, Bank of America was able to generate mortgage originations of $22.5 billion. Wells Fargo was the largest originator with $125 billion.
Hedge Fund Discloses Ownership
John Paulson recently disclosed that his fund owns just over 27 million shares of Bank of America. This is interesting because Paulson's fund actually dumped all of its BAC holdings early last year but appears to once again believe in the financial giant.
In addition to Paulson, as of the end of the fourth quarter 2012, 93 hedge funds owned shares in Bank of America. And in terms of capital inflows, BAC was one of the highest in the financial banking sector.
As I mentioned in the title of the article, Bank of America has recently soared to two-year highs. As the chart below shows, Bank of America has had an unbelievable past 52 weeks.
During the past year, Bank of America has returned approximately 68%. This is higher than all the companies I mentioned earlier including Goldman, Wells Fargo, Citigroup, and JPMorgan. Additionally, BAC has all the momentum in the world since it has recently blasted through its previous two-year high. This was accomplished on the back of a strong earnings report and lawsuit settlement, which I will discuss now.
Settlement with MBIA Inc. (MBI)
One of the prior concerns with Bank of America was its entanglement in a lawsuit with MBIA. MBIA had filed a lawsuit over a dispute over faulty mortgage securities issued during the U.S. housing boom. In the settlement, Bank of America agreed to pay the company $1.7 billion. $1.6 billion will be paid in cash, along with some other compensation, and will provide MBIA with a credit line of $500 million. Bank of America will also get stock-purchase warrants in MBIA's holding company that could give it a stake of around 5%.
Although $1.7 billion is a lot of money to give away, it clears away the uncertainty that was holding the share price from really breaking free. Now with the uncertainty removed, the shares have exploded with no signs of slowing down.
I wrote a prior article describing five reasons why investors should buy Bank of America on April 12, 2013. Since that point, the stock has appreciated another 6.5% and I see no reason for that momentum to slow down based on the reasons laid out above.