BoA Expected To Pay $16bn To U.S. Regulators: What Does It Mean For Shareholders?

| About: Bank of (BAC)


Bank of America continues to report solid earnings.

Loans have been restructured, minimizing their effect on BoA stock prices.

The legal settlement will remove Bank of America's liabilities in the mortgage crisis.

The bank continually outperforms the industry average and reports high gross profit margins.

While Bank of America is on the hook to payout $16 billion to regulators, it is still hot on the list of investors, with solid earnings reported by both JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS). The payout seems on the surface to be a thorn in the side; however, BOA's showing on the market thus far speaks otherwise.

In similar fashion, Citigroup's (NYSE:C) stock value inched up by 3 percent in spite of its $7 billion settlement with the Department of Justice. This news has prompted analysts to look favorably towards Bank of America.

Given its upward trend and its own upcoming settlement with the Department of Justice, Citigroup's good news is shining a bright outlook for Bank of America.

Strong Stock Pricing

With the settlement expected to be about $16 billion, and considering Citigroup's stock surge, most analysts are betting on the same for Bank of America. This is strengthened by the fact that a mixed payout of cash penalty and "customer relief penalty" rules favorably for the bank.

Most investors are unaware of the fact that the DOJ settlements are comprised of cash and restructured bad loans, with the latter being a benefit to the bank. Because most of the bad loans have already been restructured, modified or just flat out forgiven, the effect they have on bank earnings may be reduced. This is contingent upon Bank of America executives being successful at convincing the DOJ into giving them credit for pre-adjusted bad loans.

The stock price is currently floating around $15.57, so an August $16 call order, given a recent 24 cent trade for earning and position, is wise. Investors could earn up to $1 should the value increase to $17.

Settlement with the DOJ

The pending legal settlement plays a critical role in Bank of America's investment value in a very positive way. The settlement, while it will cost Bank of America up front, closes the doors to liabilities and far greater costs down the road. Within the terms of the settlement, the bank will no longer bear responsibility for the mortgage crisis that crippled the U.S. economy and gave rise to multiple debt consolidation top ten services. It also serves to liberate the company and put it in a more promising light to investors, who long feared investing in a company burdened by legal strife.

It Continues to Outperform

While revenue has dropped, the company was still able to rise above the industry performance average of 8.2 percent. Revenue dropped by 5.1 percent from exactly 12 months ago causing decreases in earnings per share.

The company's steady hold in this industry and wide customer base continues to fuel its ability to put the negatives of the settlement behind them and move forward. Analysts have noted fluctuations in stock valuations and revenue, but have pegged Bank of America as an outperformer.

Profit Margin

At 86.47 percent, Bank of America's gross profit margin is considered very high, increasing from its rate for the same quarter last year. However, its net profit margin trails the industry average significantly, sitting at just 9.28 percent.

As dust from the settlement clears away, investors will have a clearer picture of things to come; but, for now, August call options seem like a good bet to get started with reinvesting in the bank.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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