Bank of America (BAC) shares have had a strong run this year. It just might be the tip of the iceberg. On October 17th, the company will report quarterly earnings and in the face of a jump in earnings from JPMorgan Chase (JPM), BAC could surprise investors in a similar fashion.
As noted in this Seeking Alpha market current;
Friday 6:14 PM JPM's Q3 results in investment banking and trading were impressive, a good sign for Goldman Sachs (GS), Morgan Stanley (MS) and perhaps BofA (BAC), KBW's Fred Cannon says: "The upside on the read-across leads us to believe BAC will post a beat to the Street in the quarter and gives us increased confidence around our $0.15 operating estimate."
If this does occur, Bank of America can see a surge in its share price that could enable it to come closer to the company's book value.
Take a look at this chart:
Last quarter the earnings, revenues, and book value increased significantly. The stock is selling at a 55% discount to book value right now.
If the company comes in with an estimate "beat" for this quarter, it might cut that discount in line with the other institutions. The discount to book value of other major banks has hovered around 30%. If Bank of America closes ranks in line with the other big banks, the share price could hit $12.50-$14.00/share in short order.
Of course that is if BAC beats the street estimates without "other issues" interfering. That might be a big IF, but stranger things have happened. In reality, Bank of America might have given all of us a hint recently. Take a look at what this article had to say:
We have to ask a simple yet complicated question. Did BofA just talk up its own book ahead of next week's earnings report? The bank issued a cautious note on USBancorp (NYSE: USB) by downgrading its rating to Neutral from Buy. Where the call becomes open to the conspiracy theory is that BofA said right ahead of earnings season that it is now time for investors to increase weightings in money center banks. It reinstated coverage with Buy ratings Citigroup Inc. (NYSE: C) with a $45 price objective and on J.P. Morgan Chase & Co. (NYSE: JPM) with a $48 price objective.
BAC is a money center bank.
Theoretical opinions aside, shareholders of BAC do have a reason to look forward to October 17th. On top of the cost cutting and balance sheet cleansing that Bank of America has done this year, the mortgage business is picking up steam. Irony of Ironies I suppose, since now the government has a full court press to push refinancing into homeowners' laps.
By pushing the envelope, banks can make money on the actual loan transaction as well as having more secure loans on the books. That will give a steadier flow of income, even if the yields are tighter.
Take a look at this article:
"Government policy is encouraging banks to make mortgages, and they want to keep it that way," said Nancy Bush, an analyst and contributing editor at SNL Financial LC, a bank-research firm in Charlottesville, Virginia. "For them it's sort of a beneficent cycle right now."
Lenders are generating revenue as middlemen between government-controlled mortgage firms such as Fannie Mae and Freddie Mac, which provide about 90 percent of the funds to the housing market, and borrowers looking to take advantage of record-low interest rates.
The Federal Reserve is pushing harder as well;
On Sept. 13, the Fed said it would buy $40 billion more in mortgage securities each month to stimulate the economy. The housing market is "one of the missing pistons in the engine" of the economic recovery, Chairman Ben S. Bernanke said at a press conference after the announcement.
Add some mortgage lending revenues and profits to the new "biggest small bank" approach that CEO, Brian Moynihan has taken, and we have some exponential growth potential. Keep in mind that the cost cutting has also been ramped up, as noted in this report:
Under Project New BAC, Bank of America has said it planned to eliminate $5 billion in annual expenses and 30,000 jobs by the end of 2013, largely through cuts in consumer and technology areas. A second phase is expected to eliminate $3 billion in annual expenses by mid-2015 by making undisclosed cuts in capital markets, commercial banking and wealth management areas.
So add it all up; reduced costs, increased revenues, increased earnings, and a potential surprise on the 17th. With the price of Bank of America shares selling at a 55% discount to book value, I just might want to buy a bunch more on Monday!
Disclosure: I am long BAC.