Bank of America (NYSE: BAC) had a successful year in 2013 with a near 30% appreciation in stock price. 2014 will be another successful year as the economy continues to move forward at a steady pace. BAC will continue to hold its own in the housing sector as home loans will continue to be flat in growth but productive in keeping BAC in the banking business throughout the American communities. This trend continues from last year and is expected to be considered the new normal. BAC is well diversified throughout the banking industry, but its success will largely appear in the management of investment portfolios. Profits will be strong and begin the push for 2014 in a positive direction.
Bank of America will release 4Q, 2013 results on January 15, 2014 at 7a.m. prior to the market's opening. The company will host an investor presentation at 8:30a.m. with the presentation available on their website and conference call, dial 1.877.200.4456 (U.S.) or 1.785.424.1734 (international), and the conference ID is: 79795.
Four major events that will be drivers for the start of 2014 for BAC. First is the new Federal Reserve Chairwoman, Janet Yellen. Second is the new leadership at the Federal Housing Finance Agency (FHFA). Third is the 2013, Financial Annual Report, and fourth is the Basel III results. Each will have impact on BAC in the next 30 days.
Janet Yellen has been confirmed as the Chair of the Federal Reserve. There is little stress in the market from the change of leadership in this mega-important position, as the market assesses her methodology very similar to out-going Bernanke. Very little is expected to change as the Feds believe the market and economy are headed in the correct direction.
The markets are a little more uneasy with former Rep Mel Watt, who will be sworn in as the head of the Federal Housing Finance Agency (FHFA). FHFA is the conservatorship of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC). Comments prior to him taking the reins have been focused on delaying several actions that would raise guarantee fees. His tenure will be defined by the direction Fannie and Freddie take during the next several years that will determine if Fannie and Freddie will shut down, revert to ownership of shareholders or another direction yet undefined. This will have an effect on the mortgage market and how banks and mortgage companies do business.
Bank of America's 2013 financial report is expected to be positive with limited growth in basic core operations and mortgages, but a strong showing in cash flow and investment income throughout 2013. We have seen a widening of net interest margins over the last month and the market anticipates this trend to continue with market factors to change this in the near future. Some basic drivers for BAC include the 51 million consumers and small business relationships with approximately 5,300 retail banking offices. The 31 million on-line active users and more than 13 million mobile users make BAC one of the big six banks in the U.S. Customer growth was good in 2013, and expected to continue in 2014 with current and future customers using more web-based programs to access accounts and do business.
BAC also has 10.666 million shares of outstanding stock. The 52-week high for BAC is $16.50, which we anticipate will be broken soon after the release of the annual financial report and the Basel III announcements.
The Price Earnings is listed at $22.50 and the book value of $20.53. We expect the book price to increase at the release of the annual financial report, pushing it close to $21.00. This leaves a lot of room for stock price appreciation as the current price to book ratio is 0.81. Over the last 2 years it has closed from about 0.6 of book, and we look for this trend to continue with a positive Basel III and the year end financial statement.
BASEL III outcome and effects
The Basel III announcements will occur in March with all markets assessing the strength of the banking industry that will push the markets forward. We expect positive results as banks will have 9 months since the final ruling (July 9, 2013) on the Basel III requirements.
Last year, Citigroup Inc (NYSE: C) and BAC ranked highest on the Basel III results, and this year's result along with the annual financial report should demonstrate another strong year for BAC. In BAC's quarterly reporting of Pillar 3 Disclosures, the Total Risk of Weighted Assets has decreased from $137 billion in January 2013, to $114 billion in June 2013 and $110 billion in September 2013. BAC continues to restructure its portfolio to lower the risks and one of the results will improve its Basel III review. 2013 was a good year for all banks, but we expect BAC to remain near the top in all categories during the release of data. After 2014 Basel III reports are released most analysts anticipate BAC to increase their dividend.
As investors, we look forward to an increase in the dividend between $0.05 and $0.10 per share. Based on the nearly 10.7 billion shares, that would be a $500 million to $1 billion in cash payout per quarter. Based on the latest figures we can track, Bank of America has over $330 billion in cash reserves. Much of this meets the Basel III requirements, but cash on hand is not the problem for the company. This is part of the reason the stock price climbed 29% from $12.05 to $15.57 during 2013. For 2014, if we see a 5-10 cent dividend per quarter ($0.40 for the year which would be about $4.5 billion cash payout), we would not expect another 30% stock appreciation, but more like 15 - 20% increase for the year.
A bit of goodwill from the company, as of December 30, 2013, Bank of America Merrill Lynch announced a social impact partnership with New York State and Social Finance Inc. that resulted in a successful capital raise of $13.5 million to fund a new pay-for-success program. The offering proceeds provided by private and institutional investors will be used to fund a 5 ½-year program focused on comprehensive reentry employment services to 2,000 formerly incarcerated individuals in New York City and Rochester, N.Y. The program is focused on providing life skills training, transitional employment, job placement and retention support to 2,000 formerly incarcerated individuals during a four-year period. Center for Employment Opportunities (CEO), will provide the service program to formerly incarcerated individuals in New York. The investors will fund the training for the first 1000 recipients, and the State of New York will fund the second half, after the proof of success has been demonstrated.
These partnerships often provide an innovative way to finance social programs that provide funding in the form of fixed income or private equity offerings (referred to generically as "social impact bonds"). These selected nonprofit vehicles enable government and non-government organizations to participate where funding limits access to people in the greatest needs area. The good will the company earns through the media and in the community is a plus the company hopes will translate into more business. If these 2000 people can secure long term employment, BAC hopes the new employees will bank with them.
We recommend Bank of America as a good investment for your portfolio. Near term, and over the next several years, BAC has good fundamentals and making profits for its investors.
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