Seeking Alpha
Newsletter provider, research analyst, portfolio strategy, portfolio management
Profile| Send Message| ()  

With the latest news yesterday of the banking stress test, Bank of America (BAC) passed (Read an overview of the report here). Actually many banks passed the test with a few glaring exceptions, Citigroup (C) being the most conspicuous failure.

click to enlarge

Bank of America Corporation (<a href='http://seekingalpha.com/symbol/bac' title='Bank of America Corporation'>BAC</a>)

Of the 19 banks tested, 15 passed and only Citigroup, MetLife (MET), Ally Financial, and Sun Trust (STI), failed. JP Morgan Chase (JPM) appeared to be the big winner as it was given approval to raise their dividend by 20% and to implement a share buy back of up to $12 billion dollars.

On the other hand, Bank of America, which was denied permission last year, decided not to ask for those concessions this time around.

On the surface that might seem odd, however my view is that this might be the major catalyst to drive Bank of America shares higher in the coming months. The money can be used to build cash reserves and deployed to make loans at a faster clip than previously, and basically be plowed back into growing the core of the company.

With all of the strategic moves BAC has taken of late, such as their decision to completely sever ties with Fannie Mae (OTCQB:FNMA) (as outlined here), they have been reducing risk and costs;

Chief Executive Officer Brian T. Moynihan is seeking to limit additional costs from faulty loans after the 2008 takeover of Countrywide Financial Corp. helped saddle the Charlotte, North Carolina-based bank with about $42 billion in expenses. In November, the lender said it refused to cooperate with what it deemed a new Fannie Mae policy that required loan repurchases if an insurer drops coverage.

I also pointed towards this CNBC report, where it was stated;

Credit Suisse analyst Moshe Orenbuch said the decision was "a positive for Bank of America in that the settlement is more likely to be finalized according to its original terms," which were arrived at last June.

Since the settlement was "structured under New York State law," Bank of America can settle with the entire trust, rather than with individual investors. Bank of New York Mellon (BK) is the trustee that agreed to the original $8.5 billion settlement.

Assuming the settlement is finalized, one more piece of Bank of America's mortgage puzzle will be solved, and since the company already set aside the settlement money last June, it is baked into the share price.

Since then, the settlement is in its final stages of approval having been filed in Federal Court (read this report) which seems inevitable to complete the agreement.

It is "feared" by some bankers that there will be a surge in foreclosures, however I do not see that happening to a great extent given Bank of America's measured steps it has taken to clean its balance sheet judiciously.

If there were to be a spike, I believe that it will serve to get Bank of America from A to point B that much faster anyway.

Financials Leading The Way Again

Back on January 9th 2012, I wrote an article stating my opinion about 3 banks and while Citigroup was the one of the three that failed the stress test, JP Morgan Chase, and Bank of America have led the way.

I am reiterating my opinion on the sector, primarily with Bank of America being the key stock to own at these levels.

I have also moved my entire position from my risk basket in which I "traded around the edges" into our core portfolio (as noted here) to be held for the longer term and added to in the even the stock dips under $8.00/share.

I feel that JP Morgan Chase could also outperform the market given its own strategy of increasing dividends and buying back shares, but it is my opinion that on a percentage basis, Bank of America can return greater profits to shareholders and I am sticking with my own estimate of a double within 12-18 months from the current levels.

My Opinion

Yesterday, Bank of America had a huge move of over 6% and I can see that momentum continuing in the short term.

We could see pullbacks at any time of course but owning BAC here could make any portfolio glitter in the long run.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.

Source: Bank Of America: The New King Of The Hill?