Can Bank Of America Continue To Dodge Bullets?

| About: Bank of (BAC)

The latest chapter in Bank of America (NYSE:BAC) legal issues has passed, and its reaffirmation to me of why to continue staying steadfastly bullish on Bank of America.

My last article was continued reaffirmation of my bullishness on the company in the midst of the $400 million settlement it worked out with regards to litigation tied to Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC).

Legal woes have roped in Bank of America's stock which, after climbing 45% over the last year, has hit a small plateau as investors ponder the risk of legal issues versus the strides BAC has made in terms of operating efficiency.

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There is zero question as to whether or not BAC is conducting its business the right way. They've reported several impressive quarters, as the bank continues to cut costs and improve the bottom line; even in the face of somewhat stagnant revenues. Warren Buffett has kept his stake in the bank intact, and Brian Moynihan has done a fine job in the top seat as CEO; he's clearly someone that major shareholders (like Buffett) as well as retail shareholders have faith in.

I, personally, like Moynihan. He's all business, with a focus on the fundamentals. He's straightforward and upfront with the public - and I'm assuming the same with his staff. He's the kind of guy I'd like to work for, and I think he's going to write his own success story at Bank of America.

The one major caveat that pops for anyone looking to invest in the company is the uncertainty with regards to litigation spawning from the 2008 financial crisis. The bank has been bludgeoning its way through most of these cases, resolving one ever couple of months - but it still has a long way to go.

However, it was reported by Zack's just two days ago that BAC had resolved yet another litigious issue with Countrywide Financial:

In a major development, another litigation overhang has been removed for Bank of America Corporation. Recently, the bank received approval from a federal judge regarding the $500 million Countrywide Financial Inc. mortgage settlement deal. Notably, BofA acquired Countrywide in 2008.

The plaintiffs had filed a class action lawsuit against BofA for misrepresenting the quality of underlying home loans in the offer documents while selling residential mortgage-backed securities (RMBS) from 2004 to 2007. Though these RMBS had the highest credit ratings, the housing market collapse in 2008 caused their ratings to fall to "junk" status.

So, yet again, we can put one more settlement behind Bank of America, tacking onto the total for 2013. No doubt, there is a long way to go, but rather than sugar coat and ignore it, BAC has a CEO that is a realist about it, acknowledges it, and likely has a realistic way of dealing with the worst situation, should it present itself.

Reported by CNBC on Wednesday, Moynihan has been open and honest in stating exactly how much is at stake, and how much of a risk legal issues are to the company:

Bank of America CEO Brian Moynihan said the bank faces up to an additional $9 billion in litigation costs related to the financial crisis and mortgages beyond what it holds in reserves.

The bank has $14 billion of reserves to cover rep and warranty claims for bad mortgages.

Moynihan was speaking at the Goldman Sachs Financial Services Conference in Manhattan Tuesday.

BofA has already paid $43 billion in litigation and repurchase costs related to mortgages, according to Moynihan's presentation.

When Moynihan presented on Tuesday at a Goldman Sachs conference, he stressed a couple of items, including:

  • He expects a profitable and lucrative 2014
  • The company continues to make progress on "Legacy Mortgage Issues"

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As I stated in my last article:

According to the company's last 10-Q filing from Q3 2013, the company had $232.3 billion in shareholder's equity and 10.6 billion common shares outstanding. That works out to a back of the napkin book value of almost $22/share. That means Bank of America, in the midst of restructuring and getting ready to "re-grow", up its dividend, and clean up its legal mess is trading at a discount of almost 25%.

Compared to other banks, Bank of America still trades at a sizable discount to what the market is valuing other companies in the sector.

With the fundamentals in place and someone levelheaded like Moynihan at the helm, I remain bullish on Bank of America. I truly think the company can continue to dodge legal bullets, as it's been doing - and Warren Buffett, who has personally met Moynihan, feels the same way. There is a lucrative risk/reward here just waiting to be priced into BAC's stock price when these issues subside. That, in combination with bullish guidance for 2014 and potential dividend growth, makes BAC a great candidate for a continued investment.

Best of luck to all investors.

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