Since the start of 2013, the stock price of Bank of America (NYSE:BAC) has increased 35%, with a current 52-week range of $10.98 and $16.5, whereas the S&P 500 index rose roughly 29%. It has always been one of the relatively stable stocks in the industry. Unfortunately, following the 2008 financial crisis, the bank has gotten itself a lot of baggage in the form of litigation. Especially, the month of December has been really demanding for the bank in terms of litigation. The company already has given more than $50 billion for such settlements, loan and foreclosure losses and legal costs in the past. Recently, Countrywide Financial settled yet another claim worth $17.3 million for selling junk mortgage-backed securities to the investors - $11.3 million of this settlement will be used as compensation for the investors of the Pension Reserves Investment Management Board, while the other $6 million will go to the state.
Legal Obligations Are Not Over Yet
With having paid over $50 billion in settlement claims - one would think the worst is behind the bank regarding litigation costs. However, there are still substantial potential legal obligations that the bank will have to pay. Analysts and the bank itself has spent some time estimating the foreseeable legal costs that the bank is still likely to face and the number comes up to $23 billion. This may include the possible legal costs or buying back or compensating for the faulty securities it sold in 2008. Bank of America has a lot to lose after all.
The biggest threat at the moment is the battle with American International Group (NYSE:AIG) about the $8.5 billion settlement agreement including Bank of New York Mellon (NYSE:BK). There are a lot of theories by a number of analysts about the total cost of the battle in case of an unfavorable outcome. AIG has accused Bank of New York Mellon, which is the trustee in this deal, of being biased and not protecting the interest of all investors due to the fear of further liabilities. It is a very complicated case and it is extremely difficult to say what will be the outcome of the battle as the case is still underway. However, it is clear that the bank will have to pay at least $8.5 billion agreed in the settlement talks, even if the verdict is in favor of B of A.
Ability To Meet Obligations
The bank has a reserve for future litigation costs believed to be in the range of $3- $11 billion. On top of that, the bank claims to have the ability to pay as much as $5.1 billion aside from the legal reserves. Analysts have different opinions on how much the bank would have to pay to settle these lawsuits but even if we were to take the whole amount of $23 billion, I believe the improving condition of future cash flows will allow the bank to handle these costs.
Moreover, looking at the reserves, the bank can cover up to 70% of the legal claims of total $23 billion i.e. $16.1 billion. Besides that, the bank madenet income of $2.76 in 2012, $85 million in 2011 and a loss of $3.6 billion - With this kind of growth rate and considering the fact that the bank already made $7.9 billion in the first three quarters, I would expect the net income of 2013 to be around $10 billion. Therefore, investors do not need to worry about the legal costs.
Bank of America's performance has improved since its fall in 2008 and the numbers reflect it. The bank had the highest amount of settlement claims on its head as compared to its peers combined, but the bank has dealt with this situation in a remarkable way and still has a cushion for rest of the potential payable settlements.
Bank of America's Net tangible book value is $156.5 billion as of the third quarter earnings report. The net tangible value per share gives how much a shareholder would get for one share of a company should the company gets liquidated. It does not include intangible assets such as goodwill, patents or licenses. At the moment, the tangible book value per share comes out to be $14.67 - The stock is trading at a premium of 13.5% according to the closing price of January 07, 2014. Analysts at Citigroup (NYSE:C) rate Bank of America a buy and increased the price target to $19 from the previous value of $16 per share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.