Bank of America: Earn 6.5% While You Wait

David Kostin of Goldman Sachs, in a recent article, lumped Bank of America (BAC) into a category labeled as big banks with non-interest income of "76% of total earnings"; lets go to BAC's Investor Fact Book 2007. Non-interest = 48% of total income or, 37% smaller than Mr. Kostin's claim. Non-interest has nine categories; three of possible current concern are: Mortgage Banking = 1.3%; Other = 2.1%; and Service Charges = 13.4%. Mortgages + Home Equity = 22.3% of assets.

BAC has recently completed a $12 bil. preferred sale [plus VISA IPO for appx. $546 mil.]. That, coupled with other measures should boost Tier 1 Capital from the current 6.8% to 8% [the regulatory minimum is 4%]. Assets as of 12/31/07, following FAS 157 of Nov.14, 2007 are at: Level 1 = 14.2%; Level 2 = 79.0%; Level 3 = 6.8%.

BAC is on the S&P "Dividend Aristocrats" list and is part of Mergent's "Dividend Achievers Index" - DAA. BAC has always raised and never cut its dividend from 1991 thry 2005 [Value Line]. BAC CEO Ken Lewis has made supportive statements regarding the dividend. "In terms of attracting capital, you don't want to reduce the return on that capital. So it might be counterintuitive to cut the one thing that might bring in new investors," noted Wayne Abernathy [executive director, American Banking Association] in reference to dividends.

Then there is Countrywide Financial acquired on the cheap. But within Countrywide is a Federally charted thrift called Countrywide Bank. The 10% deposit limit does not apply to Federal thrifts. Might BAC seek a regulatory "reward" for buying and cleaning-up Countrywide; such as being allowed to use Countrywide Bank to circumvent the 10% depost limit? BAC is currently at 9.88% of national deposits.

With a 6.5% yield I fail to see any serious problem from any but the most restricted time horizon. As CEO Lewis said, "arithmetic overcomes all your issues."

Disclosure: Long

Comments

[William Eic...:]

Forgot to add this to above:

A bank is "well capitalized" if Tier1 capital equals 6% and Tier 1 + Tier1 capital equals 10%; BAC is at 11.02% [10-K, 02/28/08].

2008 Apr 07 12:21 PM

[William Eic...:]

OK...shoot me...one more change:

Tier1 + Tier2 Capital equal 10% to be "well capitalized;" and BAC is at 11.02% [10-K, 02/28/08].

The point still stands...between yield and call money BAC makes fro an interesting financial stock.

2008 Apr 07 12:25 PM

[James Cullen:]

These are the kinds of things that should go in your article. Leaving them out makes me question how well-thought out your thesis really is.

2008 Apr 07 01:00 PM

[James Cullen:]

And I mean that, of course, in the most constructive way possible - but to make a further point, I just think that given the present environment, it's foolish to use inductive reasoning (i.e. they've "always" raised their dividend) to suggest the same will hold in the future. While I don't anticipate a dividend issue at BAC, I do feel playing the role of Devil's Advocate/Meredith Whitney is a useful exercise.

2008 Apr 07 01:03 PM

[E.D. Hart:]

Citigroup assured the investment community that the dividend wouldn't be cut, before they cut it.

BAC wouldnt need to cut the dividend fo the price to trade sideways. They might just not raise it for several years.

2008 Apr 07 07:49 PM

[Ames Tiedeman:]

But will they cut the dividend? I say, yes they will.

2008 Apr 07 08:22 PM

[whisperonth...:]

You guys don't scare me. I'm still not cutting loose of my BAC. Even at HALF it's a good dividend, but I'm betting they won't cut it.

2008 Apr 08 06:24 PM