Bank of America Will Emerge a Healthy Survivor

The stock market dropped slightly at Monday's open, and much of that can be attributed to Bank of America’s (BAC) first quarter numbers. The nation’s largest retail bank saw its net profit fall 77% and its earnings per share were $.23 -- a significant disappointment from consensus estimates of $.41 per share. Bank of America CEO Ken Lewis blamed $1.3 billion in trading losses and the need to increase reserves for potential charge-offs of bad loans. Lewis accompanied the results with a slightly downcast projection for the future of the U.S. economy. Yet, he was not ready to proclaim a recession as he saw “minimal at best” growth for second quarter GDP and only a slight pickup for the second half of the year.

Bank of America’s trading losses would have been worse had it not been for the nearly $800 million it made from selling a portion of its stake in the Visa IPO. BofA is also considering selling its 9% stake in the China Construction Bank, according to the Financial Times, which is an asset that would surely be in high demand.

They have options with CCB that if exercised would allow them to buy additional shares at below market value to increase the value of their share in the second largest bank in China. So, BofA does have some options when it comes to shoring up its balance sheet and--when compared to other investment banks--BofA’s overall risk exposure to the credit markets is fairly modest.

According to Bloomberg, this year financial stocks have averaged a drop in net profit of around 85%--by far the worst performance of any sector. Bloomberg estimates that earnings for S&P 500 companies will drop by an average of 13.7% for the first quarter. We tend to agree that we are not “out of the woods” yet as far as financials go and more write-downs related to the credit crisis could be on the way for at least another quarter.

Bank of America’s results do not greatly concern us as they are relatively unremarkable in comparison to the rest of this distressed sector and it seems curious that the market interpreted BofA’s news negatively. Recall, last week Citigroup announced another huge write down and cut 9000 more jobs and that stock rallied. It certainly appears that Bank of America is doing the right things in strengthening its balance sheet and holding cash in reserve to account for possible future write-downs.

We currently have a neutral rating on BAC stock. Given the market climate and Bank of America’s earnings, sales, and cash flow, we believe that BAC is fairly priced. Long term investors may want to take a look at BAC because of its relative financial strength.

The company will be especially attractive when the housing market bottoms, as the acquisition of Countrywide Financial, which will be completed sometime in the third quarter, will make it the nation’s largest mortgage lender and one of few healthy survivors.

Disclosure: None