Bank Of America: A Final Pre-Stress Test Credit Risk Analysis
- Bank of America was the 4th most heavily traded bond issuer in the US on January 20. The bank's short-term default probabilities are up almost 0.40% since September 9.
- The bank's average credit spread is 0.196% over the composite marginal cost of funds of big bank peers as measured by the U.S. Dollar Cost of Funds Index.
- The ratios of credit spread to default probabilities for Bank of America bonds rank in the bottom 38% of all heavily traded bond issues on January 20.
Update: Bank Of America Q4 2014 Earnings - NII To Improve Going Ahead
- Bank of America posted impressive fourth quarter 2014 earnings.
- Wealth business grew as per our expectations.
- We now believe the bank's NII will recover significantly going ahead, boosting the stock higher.
- Bank of America has resolved 98% of the balance relating to RMBS Securities that are the subject of litigation or potential litigation, reducing the likelihood of future "non-recurring charges".
- Bank of America is expected to earn $1.44/share in 2015 and $1.70/share in 2016, and its share price is only 9X projected 2016 EPS.
- We expect Bank of America to pass the Federal Reserve's CCAR Stress Test in 2015 and increase cash returned to shareholders due to its strong capital position.
- Warren Buffett's Berkshire Hathaway remains the largest (indirect) stockholder through its investment in Bank of America's preferred stock and warrants.
- Bank of America has been reducing its core operating expenses and we believe there remains potential for Bank of America to reduce its expense base further.
Bank Of America: Panicked Investors Are Missing The Big Picture
- BAC’s fourth quarter was terrible and the stock sold off heavily.
- But the underlying strength in the balance sheet and credit trends are setting BAC up for long term success.
- I maintain my buy call as BAC’s capital returns should be higher as litigation expense has come way down.
Bank Of America: Investors Are Irrationally Optimistic On Its Valuation
- Bank Of America is one of the most followed retail investors' stock.
- Many believe that it is grossly undervalued and only a matter of time before the stock heads to $30 and beyond.
- In fact, it is much closer to fair value than many investors believe and some have developed irrational expectations of future performance.
- In this article, I will provide a sum-of-the-parts valuation of BAC and compare the outcome to its current share price.
- Bank of America missed revenue expectations by a wide margin, but the miss was largely driven by an accounting adjustment and weak trading results; core results looked alright.
- Management has done a good job of reducing expenses and has positioned the balance sheet to be highly sensitive to future rate increases.
- Based on a sub-10% long-term ROE and a near term ROTE just above 10%, Bank of America's fair value seems to lie around $17.50 to $18.00.
- Bank of America Corp reported 0.25 earnings per diluted share vs. 0.31 consensus.
- There were 3 main drivers for this miss. I will explain them in detail here.
- Long Term Investors should consider this an opportunity to buy.
Bank Of America: Q4 Earnings Miss Nothing To Sweat About
- Bank of America reported weak Q4'14 numbers that disappointed the market.
- The bank continues to generate solid core profits including $3.1 billion in Q4.
- Investors should not over think the situation with the stock trading at an attractive valuation and slowly making it through a tough environment.
Bank Of America: Revenue Miss Leads To More Uncertainty
- A $2 billion top line miss sends shares toward their 52-week lows.
- Expenses and credit quality continues to improve, but significant declines in net interest margins are still weighing down the bank's results.
- Rates continue to haunt the bank's earnings, but not all of this is bad because of hefty asset appreciation in the debt portfolio.
- The bank doesn't scream buy right now, but further declines and uncertainty could start to add more reward to the inherent risk in the company's shares.
- Once again, Bank of America reports earnings that are quite disappointing.
- CEO Brian Moynihan is now in his fifth year of leading the bank and provides no vision for how the bank might come out of this situation.
- Reasons outside of the bank can always be found for why the bank failed to perform, but maybe the problem is not "out there."
- At a price just above tangible book value and well below book value, Bank of America has 50% upside from current prices.
- 2014 was the year in which Bank of America finally relieved itself of its biggest liabilities stemming from the Financial Crisis.
- The balance sheet has never been better, which should allow for an increase in the dividend and stock buyback after the coming CCAR.
Bank Of America: What To Do After Bank Of America's Terrible Q4 Earnings
- Bank of America reported weak fourth quarter results yesterday.
- The bank missed revenue and earnings estimates.
- Analysts obsess over Bank of America's performance in Sales and Trading, which is the least predictable (and least important) segment within the bank.
- Shares tumbled more than 5% yesterday.
- Clear-headed investors take advantage of yesterday's emotionally-fueled sell-off and snap up an essential banking firm at a VERY competitive valuation.
Will Bank Of America Top The Whisper Number This Quarter?
- The whisper number is $0.34, two cents ahead of the analysts' estimate.
- Bank of America has a 54% positive surprise history (having topped the whisper in 29 of the 54 earnings reports for which we have data).
- The overall average post earnings price move is 'negative' (beat the whisper number and see weakness, miss and see weakness) when the company reports earnings.
Bank Of America Corp: How To Approach Earnings This Week
- Bank of America earnings are scheduled for this week, approach with caution.
- Bank of America reported that it expects lower sales and trading revenues.
- We will take a look at some of the internal and external factors surrounding the current valuation.
- I give a buy recommendation technique for long term investors that know they want the stock.
Bank Of America: Righting The Ship After The Financial Crisis
- Bank of America stock has under performed so far in 2015.
- The significant outstanding legal issues are behind the bank.
- The bank has been focused on cutting costs and becoming more efficient.
- The bank’s Q4 earnings release will provide meaningful detail on the progress of the bank after the DOJ settlement.
Break Up Bank Of America? Better The Devil You Know Than The One You Don't
- Recently there has been resurgence in calls to break up Bank of America.
- This thesis is these banks present significant risk to the economy.
- I beg to differ. Breaking up Bank of America is a very bad idea. In the following article I will make my case.
- Several members of congress are calling out to break up the large U.S. banks.
- The Fed has recently introduced a proposal for additional capital surcharges for U.S G-SIBs, incentivizing BAC (and other large U.S. banks) to reduce size and complexity.
- More recently, well-known banking analysts argued for certain large banks to consider the benefits of breaking up - with a view to maximizing shareholders' value.
- Can BAC achieve a loftier valuation (say similar to Wells Fargo) on a split up basis?
- BAC's 2.8% decline this year is an opportunity to get into an inexpensive stock on a price-to-book basis.
- Last year was a watershed year for BAC as it finally settled a critical lawsuit and was allowed to raise its dividend.
- Over the next few years, the dividend should continue to grow, giving BAC the potential for 20%+ upside.
Thu, Jan. 22, 12:35 PM
- Mercilessly sold since the year turned, banks are putting in a rare session of outperformance, helped along by some earnings beats from regional lenders and the return of animal spirits in M&A with RBC's purchase of City National (CYN +18.6%) for $5.4B.
- The XLF +1.4% vs. the S&P's 0.6% gain today, and the regional bank ETF (NYSEARCA:KRE) is higher by 3.1%.
- Among today's reporters putting in big gains are KeyCorp (KEY +5.5%), BB&T (BBT +2.4%), and Huntington Bancshares (HBAN +2.6%), though Flagstar Bancorp (FBC -4.8%) missed estimates.
- Others: Regions Financial (RF +3.9%), PNC Financial (PNC +1.6%), Synovus (SNV +3.2%), M&T Bank (MTB +3%), Hudson City (HCBK +3.1%), First Horizon (FHN +2.7%), and First Republic (FRC +4.9%).
- ETFs: XLF, FAS, FAZ, UYG, KRE, VFH, KBE, IYF, IAT, IAI, SEF, IYG, FXO, FNCL, KBWB, QABA, FINU, KRU, RWW, KBWR, RYF, PSCF, FINZ, KRS
- Among the TBTFs, Citigroup (C +2.7%) and Bank of America (BAC +2.5%) are leading the way.
Thu, Jan. 15, 9:51 AM
- With Bank of America (BAC -3.1%) getting battered again (now off 13.8% YTD) after this morning's mixed earnings report, let's get a bull's take:
- EPS was about inline despite the revenue miss, says Evercore ISI's Glen Schorr, and the bank still has a good story to tell on expenses (off 8%, ex-litigation), capital, leverage, and credit. Consumer & business banking, wealth management, and global banking are all performing well and are why investors will be patient on BAC as a U.S. economy/higher interest rate play.
- "Our gut is investors will be bummed about the revenue decline but stick with the stock as story hasn’t changed and valuation is a lot more palatable post the recent drop.”
- Previously: BofA earnings call: There's good volatility and bad volatility (Jan. 15)
- Previously: BofA off 2% after Q4 results (Jan. 15)
Thu, Jan. 15, 9:19 AM
- "FICC trading tends to do best in a rising rate environment when activity levels rise as rates rise," says Bank of America (NYSE:BAC) CFO Bruce Thompson on the earnings call. In other words, volatility for its own sake isn't necessarily good for FICC as new issuance slips when credit markets back off. "That's what I would characterize as bad volatility."
- Webcast and presenation
- Earlier, the bank reported FICC revenue of $1.5B in Q4, down from $1.9B from last year's already weak level.
- In the meantime, Bank of America remains a cost-cutting play, and CEO Brian Moynihan's "New BAC" had the bank cutting another 300 branches in 2014 to 4,855, and another 18.4K employees to 223.7K. Helping is mobile, with the number of mobile customers up 15% Y/Y, and 12% of deposits done with mobile vs. 9% a year ago.
- Shares -2.9% premarket and now off nearly 15% YTD.
- Previously: BofA off 2% after Q4 results (Jan. 15)
- Previously: Bank of America EPS of $0.25 (Jan. 15)
Dec. 11, 2014, 9:20 AM
- SolarCity (NASDAQ:SCTY) has partnered with BofA Merrill Lynch (NYSE:BAC) to form a new investment program for financing an estimated $400M in solar power projects in 2014 and 2015.
- The new residential program follows BofA Merrill's prior commitment to finance more than $200M in commercial solar power projects with SolarCity, and is part of BofA's current 10-year, $50B environmental business goal to advance lower-carbon economic solutions.
- SCTY +0.5%, BAC +0.6% premarket
Dec. 9, 2014, 8:47 AM
- Already under pressure amid a sizable global selloff, Bank of America (NYSE:BAC) is now lower by 2.7% premarket after CEO Brian Moynihan, presenting at the Goldman Sachs financial services conference - warns Q4 trading revenue will fall both from Q3 and versus one year ago.
- There's been a lot of talk about higher interest rates, but they remain low, and Moynihan reminds of that negative impact to NII.
- Presentation slides
Dec. 5, 2014, 10:06 AM
- Among those counting on higher interest rates to boost profits are banks, insurers, and online brokers, and all are outliers to the upside in today's session after a strong November jobs report has rate hike expectations on the rise. The XLF is up 1%.
- TBTFs: Bank of America (BAC +2.1%), Citigroup (C +1.8%), JPMorgan (JPM +2.2%), Wells Fargo (WFC +1.2%)
- Regionals (KRE +1.9%): Regions Financial (RF +2.6%), KeyCorp (KEY +2.3%), Huntington (HBAN +1.5%), BB&T (BBT +1.6%), Zions (ZION +4%)
- Custodials: BNY Mellon (BNY), State Street (STT +1.6%), Northern Trust (NTRS +1.8%)
- Life insurers: MetLife (MET +2.1%), Prudential (PRU +2.5%), Lincoln National (LNC +2.3%)
- Online brokers: Schwab (SCHW +3.8%), E*Trade (ETFC +3%), Ameritrade (AMTD +2.7%)
- Previously: Short end of yield curve on the move after jobs number (Dec. 5, 2014)
- Previously: Bonds and dollar higher, gold slumps after strong jobs report (Dec. 5, 2014)
- ETFs: XLF, FAS, FAZ, UYG, KRE, VFH, KBE, IYF, KIE, IAT, IAI, SEF, IYG, IAK, FXO, FNCL, KBWB, RKH, QABA, FINU, KRU, RWW, KBWR, RYF, KBWP, KBWI, PSCF, FINZ, KRS
Oct. 16, 2014, 7:08 AM
- "Given drastically reduced litigation expenses going forward, we think the core earnings power of the company should begin to accrete to existing shareholders, allowing book value growth at a company that has struggled to grow TBV since the crisis," says FBR's Paul Miller, upgrading Bank of America (NYSE:BAC) to Outperform, with price target lifted to $20 from $18.
- On target cost savings, he says, has proven management's ability to execute its strategy to improve shareholder returns, and he sees the possibility for 2015 EPS to exceed his $1.60 estimate.
- Previous earnings coverage
- Shares -1.8% premarket as broad markets are set for another tough day.
Oct. 15, 2014, 7:22 AM
- Net income of $168M includes a $5.3B or $0.43 per share pre-tax legal charge for global mortgage settlement. Earnings one year ago were $2.5B, or $0.20 per share.
- Net interest income of $10.4B flat from a year ago.
- Noninterest income gained 2% Y/Y, when excluding DVA adjustments. Net charge-offs of $1B fell 38%. Net charge-off ratio of 0.46 compares to 0.73 one year ago.
- Noninterest expense of $19.7B vs. $16.4B a year ago. Excluding litigation expense, noninterest expense of $14.2B fell 7% Y/Y, thanks to sizable personnel cutbacks (mostly in legacy mortgage).
- Consumer and Business Banking net income of $1.856B vs. $1.787B a year ago. Average deposit balances up 4%. Mobile banking customers up 15% to 16.1M - 11% of deposits were made via mobile vs. 8% a year ago.
- Consumer Real Estate Services net loss of $5.184B vs. loss of $990M a year ago, thanks to the mortgage settlement. $11.7B of mortgages originated and $3.2B of home-equity loans vs. $22.6B and $1.8B a year ago.
- Global Wealth and Investment Management net income of $813M vs. $720M a year ago.
- Global Banking net income of $1.414B vs. $1.137B a year ago.
- Global Markets net income of $769M vs. a loss of $875M a year ago. FICC revenue of $2.2B gains 11% Y/Y, driven by currencies as volatility returned late in the quarter.
- Tangible book value per share of $14.13 vs. $13.62 one year ago.
- Conference call at 8:30 ET
- Previously: Bank of America beats by $0.08, beats on revenue
- BAC +1.2% premarket
Oct. 2, 2014, 7:28 AM
- Bank of America (NYSE:BAC) is boosted to a Buy with price target raised to $20 from $16.80, while JPMorgan (NYSE:JPM) is cut to a Neutral with $64 price target.
- BofA's deposit profile means it will be under less pressure than peers to pass along Fed rate boosts to depositors, says UBS. JPMorgan, on the other hand, has a smaller amount of "core deposits" than its peers, says UBS, and could see outflows when rates rise.
- BAC +1%, JPM -1% premarket
Sep. 25, 2014, 3:09 PM
- Today's resignation of Attorney General Eric Holder could mark the beginning of the end of the Justice Department’s push to hold big banks accountable for their conduct leading up to the financial crisis.
- Several big banks, including Goldman Sachs (GS -2.1%) and Wells Fargo (WFC -1.1%), are still under investigations by the Justice Department for their sale of flawed mortgage securities before 2008, but settlements in those cases are expected to be much smaller than the big sums extracted from Bank of America (BAC -1.8%), JPMorgan Chase (JPM -2%) and Citigroup (C -2.2%).
- Another sign that the big bank cases may be winding down: Tony West, who was Holder’s point man in the bank settlement talks, recently left the Justice Department to join PepsiCo as its general counsel.
Sep. 18, 2014, 12:53 PM
- Banks, insurers, brokerages and anything else starved for yield continue to gain following yesterday's FOMC news. Among the gainers are Bank of America (BAC +1.9%) - which breaks above $17 for the first time since April - Citigroup (C +2.7%), Wells Fargo (WFC +1.1%), PNC (PNC +1.1%), Fifth Third (FITB +1.7%), SunTrust (STI +1.2%), Schwab (SCHW +2.3%), Prudential (PRU +2.5%), and Lincoln National (LNC +2.4%).
- The XLF +1.2%, KBE +1.5%, and KRE +2%.
- Financial sector ETFs: XLF, FAS, FAZ, UYG, KRE, VFH, KBE, IYF, IAT, SEF, IYG, FXO, KBWB, FNCL, RKH, QABA, FINU, KRU, KBWR, RWW, RYF, KRS, FINZ
- Lit up bright red is the utility sector (XLU -1%), led by Southern Company (SO -1.1%), Dominion Resources (D -1.2%), Duke Energy (DUK -1.4%), and Pinnacle West (PNW -1.9%).
- Utility ETFs: XLU, IDU, VPU, UPW, RYU, FUTY, PUI, FXU, SDP, PSCU
Sep. 17, 2014, 3:16 PM
- Leading markets higher as the reality of higher interest rates gets nearer is the financial sector (XLF +0.9%). Whether its banks, brokerages, or insurers, a higher benchmark rate for some time has been considered a key bullish catalyst. An especially large move is being seen in the online brokerage names who have been forced to forego money market fees for years thanks to ZIRP: E*Trade (ETFC +3%), Schwab(SCHW +3.2%), Ameritrade (AMTD +2%).
- Morgan Stanley (MS +1.8%), Bank of America (BAC +1.2%), JPMorgan (JPM +0.9%)
- U.S. Bancorp (USB +1.1%), Regions Financial (RF +2%), New York Community Bank (NYCB +0.8%), Huntington Bancshares (HBAN +1.3%), KeyCorp (KEY +1.3%)
- MetLife (MET +0.6%), Voya Financial (VOYA +0.7%).
- Chubb(CB +0.4%), AIG (AIG +1.1%), Hartford (HIG +0.8%)
- Financial sector ETFs: XLF, FAS, FAZ, UYG, KRE, VFH, KBE, IYF, KIE, IAT, SEF, IYG, IAK, FXO, KBWB, FNCL, RKH, QABA, FINU, KRU, KBWR, RWW, KBWP, RYF, KBWI, KRS, FINZ
Sep. 9, 2014, 12:24 PM
- The Fed intends to impose a capital surcharge on banks tougher than the international standard, according to Fed Governor Daniel Tarullo's prepared remarks for the Senate Banking Committee. Those banks with heavier reliance on short-term funding like overnight loans - i.e. Goldman Sachs (GS -1%) and Morgan Stanley (MS -1.8%) - will likely face even more rigorous requirements.
- Officials haven't yet decided on a number, but reportedly are considering as much as 200 basis points more than the top range of 2.5% of risk-weighted assets agreed to by international regulators.
- What's not yet clear is who would need to raise capital to meet the new, tougher standard.
- Citigroup (C -1%), Bank of America (BAC -0.6%), JPMorgan (JPM -1.3%), Wells Fargo (WFC -0.4%), State Street (STT -1.1%), Bank of New York Mellon (BK -0.9%)
- ETFs: XLF, FAS, FAZ, UYG, VFH, IYF, IAI, SEF, IYG, FXO, FNCL, FINU, KCE, RWW, RYF, KBWC, FINZ
Sep. 8, 2014, 8:41 AM
- "The major catalyst for shares in our opinion is the resolution of the bulk of Bank of America's (NYSE:BAC) legal issues with its AG settlement," says analyst Richard Ramsden, upgrading to a Buy with price target lifted to $19 from $17.
- "Legal costs have obscured much of the fundamental improvement at BAC."
- Shares +1.1% premarket
Aug. 21, 2014, 2:51 PM
- "We can start to see how [Brian Moynihan] can start running the company for shareholders and not litigants," says analyst Marty Mosby following Bank of America's (BAC +3.8%) $16.65B mortgage settlement with the government.
- The removal of the legal overhang is nice as is today's rally, says portfolio manager Dave Ellison (an owner of the stock), but higher interest rates are necessary for a sustained move upward in the shares.
- "We believe they have a wonderful franchise - the question now is, 'Do they,'" says fund manager Greg Donaldson. "If they do, their earnings will move sharply up because all of their energies will be poured into making their businesses better."
- And from The Oracle - whose 700M warrants struck at $7.14, if exercised, would make Berkshire Hathaway BofA's largest shareholder? "[Moynihan] is nurturing a huge and attractive underlying business that will endure long after today's problems are forgotten," he said in his annual letter in 2012.
- Previously: Bank of America confirms U.S. deal; +1.1% premarket
Aug. 21, 2014, 9:12 AM
- Previously tipped off as being about $17B, the $16.65B comprehensive mortgage-related settlement with the DOJ and six states' Attorneys General includes a $9.65B cash payment and about $7B of consumer relief.
- The deal is expected to reduce Q3 pretax earnings by $5.3B and EPS (after tax) by about $0.43 per share.
- Source: Press Release
- BAC +1.1% premarket
- Previously: BofA reportedly settles mortgage claims for $17B
BAC vs. ETF Alternatives
Bank of America Corporation is a bank holding and a financial holding company. Through its subsidiaries, it provides banking and non-banking financial services and products throughout the United States and in selected international markets.
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