- Bank of America pays a record $16.65 billion settlement with the DOJ.
- With the subprime crisis behind it, the bank can now be "normally" valued.
- At a valuation that isn't heavy with legal risk, the bank looks like a nice buy here.
The news today was that Bank of America (NYSE:BAC) came up with $16.65 billion to resolve the biggest liability having to do with the subprime crisis from 2008. It's the end of a process that has been a dark cloud hanging over the head of Bank of America since they made a proper mess out of the Countrywide deal; widely regarded as one of the worst purchases in the history of the banking industry.
USA Today posted one of the easier reads on the situation today, noting the following;
Announced by federal and state officials in Washington, the deal requires the nation's second-largest bank to pay $9.65 billion in cash and provide $7 billion for consumer relief, such as reducing mortgage payments for struggling homeowners and funding neighborhood stabilization efforts.
The cash payment includes a $5.02 billion civil penalty to the Department of Justice, and $4.63 billion in compensatory remediation payments. The compensatory payments are expected to be tax-deductible, softening the financial impact on the bank.
Additionally, the Securities and Exchange Commission said Bank of America agreed to admit wrongdoing and pay $245 million to resolve securities fraud charges filed last year related to residential mortgage backed securities.
But time heals all wounds, and Bank of America has entered into a new chapter in the company's existence. Brian Moynihan was given the job of cleaning up the mess after the mortgage crisis and now, 6 years after the economic collapse, Bank of America is finally resuming business as normal.
Just in time for the market to pull back, we think. Ironic.
We've liked Bank of America for years and were long the stock for a period of time when it moved from single digits onto double digits. We've noted that bloggers on Seeking Alpha generally seemed like bulls on the bank, and we assumed that the subprime crisis litigation would eventually end. Like everyone else, I think, there was no way we imagined the sum total of the settlement would be as high as $16.65 billion.
A bit excessive from the DOJ, we believe.
But, "all's well that ends well". The DOJ gets their pound of flesh, BAC can continue business, and BAC shareholders are likely to continue to see a move up in the company's stock as long as the global economy holds up.
After the enthusiasm in the name died down around the time the Fed rejected the bank's plans for its capital, we stopped covering the bank for some time. Today, we're happy to take another look.
What we like about Bank of America is the fact that the balance sheet is so strong that even after shelling out $16.6 billion, investors still find this company as a significant investment opportunity. The bank's price to book ratio of 0.764 is extremely attractive and is just one of several metrics that show this bank remains significantly undervalued from a FA perspective.
In addition, the bank continues to make money and increase net income. Over the past year, this has been done as a product of smart cost cutting. Going forward, we're going to look to make sure the bank can continue to grow its top line independent of cost cutting. If it can, we believe this stock will move well towards $20 by the end of this year.
The cash portion of the settlement isn't going to be crushing; it's about 6% of the company's total market cap. No matter what figure you put the $16.6 billion up against; cash, total assets, revenue; it doesn't seem to make all too much of a material difference. We are talking about a bank that lists its assets in trillions. That's trillions, with an "s" at the end.
Compared to the other banks, Bank of America was probably the best well positioned to take a hit like this. We contend that the bank is going to now be able to conduct business as usual and that shareholders and institutions are going to begin to look at this bank in an overtly positive light.
We like that Warren Buffett remains active as an investor in the company and in good candor with CEO Moynihan.
We really like the job that CEO Moynihan has done with his other executives in turning the bank around. We believe he deserves a kudos for his efforts. The bank's future is steady and stable thanks to the professional damage control he took on; for a hefty compensation package, of course.
The Peel's Feel:
The market seems to agree with our thesis, which is that, given the economic climate, this is one of the names we'd consider going long. Today, the bank had what was, for it, a significant pop of 4.12%. In after-hours trading, the bank moved up a couple additional cents as well.
No doubt the bank is the best opportunity in the banking space with its now normalized P/E of around 12x, much lower than it should be now that the risk is off the table.
We rate Bank of America as JUICY (BUY).