- Bank of America's resubmission of their capital allocation plans came and went and was, despite what people thought, a non-event.
- The bank is going to be shoring up its legal issues relatively soon, likely before the year's end.
- Short term, I see BAC heading to $16 right now. Long term, 2015 will be a clean slate for the bank and it'll be a good time to own it.
Bank of America (NYSE:BAC) had to withdraw their capital allocation plans to the Fed just a matter of weeks ago - it was pandemonium! Shock! Outrage! Panic! People swearing up and down that Bank of America stock was doomed! Cats and dogs living together! Mass hysteria!
The stock was rocked almost 5% in one day on the news that the bank's dividends and buyback were going to have to be suspended until the bank got its act together and corrected the mistakes it had made in its plan.
Despite this, if you recall, there were two people telling you that this wasn't going to have a long-term negative effect on the bank: myself, and Wells Fargo. Just to recall, here's what Wells Fargo said the day the bank had to withdraw its capital allocation plans - Seeking Alpha noted it, on the day that the issue made the news:
- "We anticipate Bank of America ( -4.6%) will underperform its peers today," is the high-priced conclusion of the team at Wells Fargo after BofA is forced to suspend its capital return plans in the wake of an accounting miscalculation.
- The actual net effect on the bank's capital will not be too material, says Wells, but reputational damage, upward pressure on expenses, and the idea of a more conservative capital return request next year could weigh on the stock over the next few months [for an example, see BB&T (NYSE:BBT) after the 2013 CCAR].
- Wells currently has a Market Perform rating on the stock.
"The actual net effect on the bank's capital will not be too material."
That was a line that I paid very close attention to when I went back and I drew my own conclusions about what this was going to do for the bank:
The fact is, if you're looking at BAC from a long-term perspective, does it really matter if the dividends and buyback are held up for a year or so? Wouldn't you much rather take advantage of the 20% gain you could make on the equity if you bought it today and it returned towards its highs? I would.
I like the idea of perhaps buying some calls for the short-term, as you're officially not missing any dividends for the time being. I'd then considering rolling those calls over into a long-term position when the bank resubmits its capital plans to the Fed.
And, with that, I took my stance that the bank under $15 was likely a bargain and that this news wasn't going to have any long standing effects on how the bank did business in the future. For long-term holders of the stock, it's simply a bump in the road.
And, no sooner did we have time to sneeze than the bank has already resubmitted its capital allocation plans to the Fed. It was reported yesterday:
- "The third party review has been completed and resulted in additional adjustments that had a de minimis effect (less than one basis point reduction) on the Corporation's reported regulatory capital ratios for the period ended September 30, 2013, and no effect on such ratios for the period ended March 31, 2014."
- The accounting error had zero impact on operations, says Dick Bove, and it now appears no impact on capital ratios either. Buy the stock, he says, as the higher dividend and initiation of the buyback should soon be re-approved.
- Bank of America's ( +3.6%) capital plan - initially approved by the Fed but then suspended following the error - was for a boost in the dividend to $0.05 per share from a penny, and a $4B buyback.
- Previously: BofA resubmits capital plan to Fed; "de minimis" effect
On the news of this, the bank's stock had its best one-day performance in months:
Bank of America gapped open and the stock jumped up over $15 with ease to finish the day at $15.22 yesterday. The stock is going to be approaching coming resistance in the 200DMA, but can look to prevent a bearish sign from running up and preventing the 50DMA from crossing downward through the 200DMA.
With this issue in the rearview (assuming the bank gets Fed approval - which they will), we can start to watch a new uptrend in Bank of America begin, and the bank will likely move right to the $16.25 levels it was at before the news was released.
The bank has another headline in the DOJ settlement that will likely finally be put to rest before this year's end. It's going to be a monetary hit for the company, but it's going to put the fear and uncertainty of the outstanding legal issues to rest once and for all.
From there, I still continue to expect to see the bank set highs over $18 before the end of this year. With Brian Moynihan at the helm and Warren Buffett within an arms reach of the CEO at all times, I'm expecting the bank to finally finish its cost cutting plan that is due to end this year and to continue firing on all cylinders backed by the common sense of its CEO.
I remain bullish on Bank of America.