Putting aside questions of whether or not the Bank of America (NYSE: BAC) can successfully win judicial approval for the $8.5 billion settlement that it entered into with the Bank of New York Mellon, investors considering whether or not BoA stock belongs in their portfolio or not should ask themselves only, are the bank's fundamentals solid?
Increased Home Loan Originations
While it has reduced its exposure to the mortgage industry since the real estate downturn of 2008, home loans remain a significant part of BofA's business. Because of this, it is an encouraging sign that the Bank is increasing its mortgage originations. For the first quarter of 2013, total home loan originations reached close to $24 billion, a significant increase of 57% from the same quarter last year and an 11% increase from the fourth quarter of 2012. And this increase seems to be part of a trend as mortgage origination volumes have been increasing over the past three quarters.
Until mid-2012, Bank of America had virtually ceased initiating new mortgages and focused on refinancing home loans. Now that the refinancing upsurge has subsided, BofA has apparently changed its strategy back to mortgage originations again, a trend that analysts view as a sign that the bank's operations are recovering. It should be noted that Consumer Real Estate Services (CRES), the BofA business segment concerned with its home loans business, has been steadily reducing its losses. After reaching a peak loss of $19.5 billion in 2011, CRES losses fell to $6.5 billion in 2012 (full year results are for the year ended December 31). As of the first quarter of 2013, CRES losses are at $2.2 billion.
The reduction in its CRES losses, as well as positive results in its other business segments have helped move the corporation back to profitability. As of the first quarter of this year, the company reported a net income of $2.6 billion, appreciably higher than the $653 billion reported in the previous year. This brought earnings per share to $0.20, which was below analysts' estimates of $0.22 EPS. Revenues were reported at $23.9 billion, which exceeded analysts' estimates of $23.3 billion, but was 8 percent lower from what was reported in the previous year.
Following the release of the earnings report, stock prices closed at $11.70 from $12.17 in the previous day's trading. Since then, however, share prices have steadily increased again, and the closing price as of June 7, is $13.38 per share.
The Housing Market Recovers
The Bank's shift in strategy to mortgage originations is a positive sign for its future profitability, given that there are indications that the housing market is starting to recover. According to results from the S&P Case Shiller Index, real estate prices increased by 11% in March, the biggest gain reported since April 2006. All 20 cities monitored by the index reported gains, with the highest increases recorded by the two cities hardest hit by the recession, San Francisco, and Phoenix, at over 22% while Las Vegas, reported a 20% increase. But even those cities, which reported single-digit increases such as New York (2.6%) and Boston (6.7%) were still characterized as enjoying quite substantial growth by the report.
The S&P index is just one indicator that the housing market is slowly recovering. The National Association of Realtors also reported that total existing home sales increased to 4.97 million in April from 4.94 million the previous month. These sales are finalized transactions that include single-family houses, co-ops, condominiums and townhouses. These figures are the highest reported since November 2009, when sales spiked to 5.44 million in the wake of the implementation of the First Time Homebuyer Credit. Meanwhile, the Department of Housing and the Census Bureau reported that sales of new residential single-family homes reached 454,000, a 29% increase over the 352,000 reported in the same month last year, and a 2.3% increase over the revised 444,000 figure reported in the previous month.
The nascent housing recovery means that the market for new home loans could once again start to grow. According to the Mortgage Bankers Association, new mortgages are expected to increase from some $503 billion in 2012, to an estimated $592 billion in 2013, and $703 billion in 2014.
The Bottom Line
While it is impossible at this point to predict which way the court will rule in the proceedings regarding the settlement between Bank of America and a group of investors in mortgage securities, if the Bank manages to secure a favorable ruling, it is in a good position to profit from the housing recovery, if it is sustainable. In its earnings report, the BofA expressed confidence that increases in its first mortgage retail originations were an indicator that its retail market share was improving, and thus it was adding staff to help improve its sales and fulfillment capacity. This could mean a substantial increase in stock prices as the company increases its profitability, allowing investors to grow the value of their holdings.
Meanwhile, the Bank has gotten approval for its 2013 capital plan, which involves repurchasing as much as $5 billion worth of common stock and the redemption of preferred stock worth $5.5 billion. This also opens the door for the BofA to request for a dividend increase, which would further boost investors' confidence in the company's fundamentals. Its declared dividend is currently at $0.01 per share, a level it has maintained since 2009. This means that there is a lot of room for the company to raise dividend payouts if it chooses to, which could boost its share prices further, in addition to providing a steady income for investors.