Berkshire (BRK.B) sold its stake in Bank of America (BAC), but nearly all analysts with a rating on the company recommend it as a “hold” or “buy.” For full-year 2010, BAC earned $10.2 billion before goodwill impairment charges. Also, Q4 earnings are $1.1 billion higher than a year earlier. Has Buffett finally recognized that BAC's balance sheet, the progeny of “mark-to-whatever,” is a work of fiction?
Most analysts maintain that Bank of America’s business model is fundamentally sound despite a questionable balance sheet. The company remains bloated, with nearly 5,900 retail banking offices to serve its approximately 57 million consumers and businesses. Management's stateside approach on the retail banking side is summed up in one sentence: BAC maintains dominant positions in regions expecting high growth such as California, Florida and Texas. There is the expectation that these markets will rebound soon.
We disagree. Heightened competition from Toronto-Dominion (TD) pushing south and Wells Fargo (WFC) pushing in all directions will dampen margins within BAC's retail segment and frustrate deposit growth.
The Global Wealth and Investment Management division grew 14 percent year-on-year, and reported a record in asset management fees for Q4. Additionally, Merrill Lynch is ranked second in investment banking revenues. Most importantly, $3 billion has already been set aside to address repurchase obligations for residential mortgage loans. We believe the worst may be behind BAC, but repurchasing obligations are likely to be double the current outlays.
The financial sector is still selling at a 25% discount to prices seen in 2008. The sector offers plenty of growth potential, but we agree with Buffett that BAC will be a laggard, rather than an engine of price appreciation. Wells Fargo, in which Buffett's Berkshire (BRK.B) increased its stake, and the JAMS stocks -- JP Morgan (JPM), American Express (AXP), M&T (MTB) and Suntrust (STI) -- are more compelling values which you can read about here.