Bank Of America Reaches New Highs After Settling With MBIA

May.10.13 | About: Bank of (BAC)

Bank of America (NYSE:BAC) finally agreed to settle its 5-year mortgage fight with MBIA (NYSE:MBI). The settlement entitles the bond insurer, MBIA, to a payment of $1.6 billion from Bank of America. In addition, Bank of America will pay back its other debts to MBIA. It will also extend a $500 million credit line to MBIA.

After the news came out regarding the settlement, MBI shares soared by a staggering 45%. The stock soared to $15.45 during intraday trading before it eventually settled down and closed at $14.29. It currently trades around $15.

Bank of America shares also jumped by 5.2% from $12.24 to $12.88 on May 6, 2013. Intraday trading saw BAC shares peak at the 52-week high of $12.89 per share. The settlement boosted the investors' confidence in Bank of America. It was taken as a sign of the bank's initiative to resolve all legal problems. Aside from that, the settlement also shows the bank's financial strength, given its capacity to pay the settlement amount.

The settlement did not only benefit MBIA. Bank of America will have its own share of the benefits, as well. Bank of America is entitled to buy approximately 10 million of MBIA shares. The acquisition price will be based on the closing price of that day, but the exercise price was pegged at $9.59 per share. The MBI share acquisition by BAC may be spread out in the next five years.

The surge of Bank of America shares came while the markets experienced slight losses. Despite the jump in share prices, BAC remains undervalued today with a P/B ratio of 0.6. This is well below its P/B ratio prior to the financial crash. BAC was operating then at about twice higher than its book value.

The current valuation of Bank of America makes it an attractive stock today. It has a market capitalization of $139.4 billion. So your investment is relatively safe with still enough room for capital appreciation. One of its closest peers, JPMorgan Chase (NYSE:JPM) has a market cap of $168.5 billion.

Well Diversified Structure

After learning a tough lesson in sub-prime crisis, Bank of America did not put all its eggs in one basket. Instead, it diversified its operation to minimize the overall risks. Today, it operates under 5 major segments. The largest segments are consumer and business banking, global banking, and global wealth and investment management [GWIM]. Other segments are the consumer real estate services [CRES], and the global markets.

The major revenue driver among these segments is the consumer and business banking. Therefore, this segment's performance will greatly affect the overall performance of the bank. Fortunately, this segment is productive and profitable.

The bank's major challenge, however, is in the consumer real estate services. The CRES segment is the only one that reported losses in the past years. In the first quarter of 2013, the CRES segment incurred about $1.3 billion in net loss. However, the losses in the CRES were offset by the net income generated in the four other segments.

Solid Financials

For the fiscal year 2012, BAC reported net income applicable to common shares at $2.76 billion. This is up by a whopping 3147% from $85 million in the previous year 2011. But without the preferred stocks and other adjustments, the net income for the year 2012 was $4.2 billion. This is still 200% higher than the previous year's net income of $1.4 billion.

Two years back, the bank reported net loss of $2.2 billion in 2010. Thus, the bank has improving net income year-over-year. The yearly growth will be sustained this year as shown by its first quarter performance.

On April 17, Bank of America released its 1st quarter 2013 earnings. It posted a net income of $2.6 billion, up 258% versus the previous quarter and 301% versus the year-ago quarter. The first quarter performance alone is twice the full-year net income in 2011. If the second quarter shows similar performance, then it will already reach last year's net income by mid-year 2013.

But in the same announcement on a comprehensive settlement with MBIA, BAC disclosed that the settlement may affect its net income. The first quarter net income will be adjusted and reduced by $1.1 billion. Therefore, from the $2.6 billion net income it originally reported, it will now become $1.5 billion. Likewise, the $0.20 per diluted common share earnings it originally reported will be down to $0.10 per diluted share. Nevertheless, the first quarter results are still better than the previous quarter and against the same quarter a year ago.

Final Words

The above data shows the impressive financial strength of Bank of America. It further reflects that BAC is back on track after the fall-down three years ago. However, investors on the trading flow have a contradictory outlook. In spite of the inspiring income statement for the first quarter 2013, BAC shares did not jump. The price even retreated slightly in the ensuing days after the release of the earnings report.

However, the announcement about the settlement of the 5-year long dispute with MBIA was good news for investors. It triggered a slight surge in BAC's shares. It is uncertain, though, if the rise will last long. But one thing is for sure; BAC is currently an undervalued stock with solid financials. The book value per share of common BAC stock after the comprehensive settlement adjustment was $20.19 per share. This is about 50% higher than its current share price. While the book value is not a great benchmark, it indicates that Bank of America is still undervalued. Therefore, it is a stock to watch for, and probably a good one for long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.