After reviewing BAC's 10Q ended 3/31/2011, I have concluded page 143 will help provide a more accurate picture of how their loan portfolio is performing. Page 143 shows not just non-performing loans but all loans past due plus purchased credit-impaired loans. The information I previously used took into account only non-performing loans. Below are my updated assumptions using more specified information.
Percentage of Loans 30 days or more past due (including purchased credit-impaired loans):
BAC's Prime Mortgages as represented by the Core Portfolio: 1.67%
All Prime Mortgages according to the latest Mortgage Banker's Delinquency Survey: 9%
BAC's Subprime Mortgages as represented by the Legacy Asset Servicing Portfolio: 46.6%
All Subprime Mortgages according to the latest Mortgage Banker's Delinquency Survey: 39%
BAC's Commercial Loans: 2.55%
All Commercial Loans according to the Federal Reserve: 9%
BAC's Credit Cards and Consumer Loans: 3.93%
Based on the above information, it appears it is only the Countrywide loans, as represented by the Legacy Portfolio, which present a problem.
My updated dire scenario projections are as follows:
Prime (Core Portfolio): 4% default rate with a 50% recovery rate. This would represent a percentage twice as high as the current delinquency rate.
Subprime (Legacy Asset): 60% default rate with a 25% recovery rate. A 30% increase from the current delinquency level.
Commercial Loans: 5% default rate with a 50% recovery rate.
Credit Cards and Consumer Loans: 8% default rate with no recovery rate.
My calculations show about the same number I had in the previous article; $107 billion of potential writedowns. With $40 billion in loan loss reserves already excluded from tangible book value, this would mean $67 billion in additional writedowns. This would leave tangible book value at $65 billion. Because the stock was hit so badly, this adjustment would leave BAC selling at just 1.2x tangible book value!
Listening to the media or the emotional doom-and-gloom on several message boards, you would never know over 98% of core loans, over 97% of commercial loans, and over 96% of credit card and consumer loans on the balance sheet are paying in a timely fashion, as well as over 53% of loans in the disastrous legacy portfolio.
The bottom line: If within BAC's loan portfolio, delinquency rates double for prime loans, commercial loans, and consumer and credit loans, and subprime loan delinquencies increase 30%, BAC would still have significant tangible book value if reasonable recovery rates are assumed. Remember, this assumes not just non-performing loans default, but ALL loans 30 days or more past due, as well as the default rate of the entire loan portfolio increasing over 60% above the current delinquency rate.
Based on further analysis, I still believe Bank of America will be back to normalized earnings by 2015, and at worst, the fair value of the stock is in the upper teens. Of course, housing could stabilize and credit losses could subside. Wouldn't that be a miracle!
Disclosure: I am long BAC.