Bank of America (NYSE:BAC) passed their stress test, Warren Buffett is still on board, dividends are likely coming - all is well in the BAC world, right? Well, they were - it was euphoria for BAC investors like myself, until Goldman Sachs (NYSE:GS) had to come out and harsh our collective mellow.
Ugh, who invited Goldman Sachs?
Goldman came out last week, post-stress test and offered their take on why BAC, comparative to the other banks tested, was a concern of theirs. I'm assuming they've not included Zion Banc (NASDAQ:ZION) for the purposes of this comparison. CNBC reported on Goldman Sachs' comments:
Most U.S. banks came out of the recent stress tests looking pretty good, with one notable exception: Bank of America.
The second-largest bank in terms of deposits passed the test but left some analysts wondering just how strong its cash position is at least compared to its competitors.
Goldman Sachs expressed its concerns over BofA in a note Friday:
With the exception of BAC, all of the banks in our coverage universe appear well positioned to receive approval for their capital asks, assuming their requests are in-line with our estimates. For BAC, we believe the company may have to resubmit its capital request, although the math suggests this is very close.
The question comes down to how much capital banks will be able to return to shareholders, a key to indicating bank health and the primary way to boost share value.
Overall, Goldman expects banks to have $90 billion of excess capital, about 45 percent of which it will return to shareholders in dividends and buybacks. Goldman projects BofA to have about $6.5 billion in excess capital against $6 billion to $7 billion in expected return-obviously a close shave for the company.
The longer look at how BofA fared was enough to rattle traders, who sent shares down about 0.6 percent in Friday morning trade while the rest of the sector fared better. The two institutions that Goldman said fared best in the tests-Capital One Financial and Citigroup-rose 2.8 percent and 0.75 percent, respectively, while the Financial Select SPDR exchange-traded fund, which contains many of the tested companies, was up about 1 percent.
It's certainly not to say that BofA is in more serious danger-its metrics in loan losses have improved considerably since the financial crisis, dropping from 10 percent in 2009 to 5.8 percent in 2014, and its capital ratios are in line as well.
In relative terms, though, Goldman said "we worry most" about the company compared to the rest of the group.
The quintessential argument against Goldman's comments resides in some of the history I've noted with regards to Goldman Sachs.
BAC Shareholders Equity (Quarterly) data by YCharts
First, let's address their points.
- Bank of America is a company with over $200 billion in equity in it. To say that $6.5 billion in excess capital versus $6 to $7 billion in expected return is a major issue is hilarious.
- Bank of America has been steadily, through cuts, growing its bottom line.
- Bank of America can, of course, adjust the amount it wishes to return to shareholders in order to make this whole point invalid.
- Bank of America ultimately passed the test - which showed it could maintain a 5% Tier 1 common equity ratio in the event of a severely adverse scenario.
- Goldman Sachs uses many qualifiers to leave themselves out with these "concerns". Statements like these show Goldman backing off of their main point:
"It's certainly not to say that BofA is in more serious danger"
Goldman said "we worry most" about the company compared to the rest of the group."
Second, let's not forget some of the bearish comments that Goldman has made in the past, only to simply "change their mind" the next day or so and come out as buyers on the dip that they, themselves, created.
Anyone who has read my articles knows that not only am I generally skeptical of analysts sometimes - noting, again, that everyone in the game has an agenda - but, notably, you may remember my beef with Goldman Sachs in particular. For more on the one time they downgraded gold and then came out and bought it the next day, read this article.
I'm not saying in any way that Goldman is manipulating the stock, I'm simply say that there would be other things that would surprise me more than Goldman coming out and taking a position in the company in the coming days. We'll have to wait and see.
For now, however, much like Goldman says, this is going in one ear and out the other for me. The "concern" that Goldman has spread simply doesn't seem warranted in this case where BAC has the right to control the capital allowances to shareholders and has a solid balance sheet with equity in the hundreds of billions.
I will, however, point out that risk remaining from litigation - something that Goldman did not point out in their statements - remains a bit bigger of a risk for the company. However, for the long-term, I do believe the bank will prevail over this issue.
I remain long BAC common and will consider adding (or potentially adding warrants) on any major upcoming dips. Best of luck to all investors.
Disclosure: I am long BAC. 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.