Environment For Bank Of America Continues To Improve

Mar.27.14 | About: Bank of (BAC)

Summary

The environment for Bank of America continues to slowly improve.

The company recently navigated a couple of milestones that should be positive for the shares.

Of the major banks, B of A has the highest projected earnings trajectory and still looks attractive at current levels.

Bank of America (NYSE:BAC) shares continue their turnaround after hitting lows near $5 in 2011. This run should continue, as new positive catalysts occurred over the last week. Although the bank was forced to resubmit its capital plan to the Federal Reserve, it was ultimately given permission to quintuple its dividend payout to a nickel a share per quarter. It was also given the go-ahead to repurchase $4B of its shares, a bit over its 2% of its overall float at current levels.

Although not optimal, this was a much better outcome than what happened over at Citigroup (C), which saw its capital return plan outright denied and is seeing its shares get hit hard in early trading Thursday. I believe the Fed is being ultra-conservative in its assessment of the bank's ability to navigate a major recession, which is certainty understandable given our recent financial crisis. Bank of America should continue to get permission to provide major dividend hikes and buybacks over the next few years, as the economy and its balance sheet continue to improve.

Bank of America also settled with the Federal Housing Finance Agency (FHFA) this week over all Residential Mortgage Backed Securities [RMBS] litigation, agreeing to pay $6.3B and repurchase certain RMBS for about $3.2B. The deal resolves four lawsuits filed against BofA, Countrywide, and Merrill Lynch, covering about $57.5B of mortgages. This is a removal of a major obstacle to get past the litigation gauntlet that has existed as the result of the financial crisis.

Bank of America is my largest position in any of the major banks and has been since just over the lows it hit in 2011. The bank has the sharpest projected earnings trajectory of any of its major competitors. The bank earned 90 cents a share in FY2013, but is projected to earn over $1.30 a share in FY2014 and more than $1.60 a share in FY2015.

It was also the only major bank to see increased market share in mortgage originations in 2013. As the housing market continues to stabilize off very low levels and move higher, B of A will benefit from this trend, which should last for several years at least.

The shares are selling just over book value and are priced at a reasonable 10.5x FY2015's consensus EPS. The stock has a five year projected PEG of under 1 (.60). It is only one of the four major banks to have a PEG of under 1 according to Yahoo! Finance. Finally, although the bank has tripled off 2011's lows, it is far below pre-crisis levels. I think it has several years ahead of outperformance. BUY

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.