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.
Yesterday, 4:48 PM
- The financial sector is off to a worse start to the year than even the energy names, with the XLF down 3.9% YTD vs. the XLE's 3.2% decline. The S&P 500 is roughly flat. The SPDR KBW Bank ETF (NYSEARCA:KBE) is off 7.5%, and the Regional Bank ETF (NYSEARCA:KRE) is lower by 6.9%.
- Q4 earnings results haven't been wonderful, but financial names had been savaged well before those reports started coming out. Instead there's a difficult regulatory regime that won't quit, and - for now - it's looking like "wait'll next year" for the rising interest rates that were supposed to drive profit margins higher. The 10-year/2-year spread - already pretty low at 150 basis points to start the year - has narrowed to 137 bps.
- A partial roll call of banks: Bank of America (NYSE:BAC) -12.1% YTD, Citigroup (NYSE:C) -10.1%, JPMorgan (NYSE:JPM) -9.4%, Morgan Stanley (NYSE:MS) -9.4%, Regions Financial (NYSE:RF) -14.7%, KeyCorp (NYSE:KEY) -4.5%, PNC Financial (NYSE:PNC) -5.4%, Bank of New York (NYSE:BK) -9.1%, Capital One (NYSE:COF) -6%, Discover (NYSE:DFS) -13.6%.
- Other spread-starved sector names: MetLife (NYSE:MET) -9.8%, AIG (NYSE:AIG) -8%, Prudential (NYSE:PRU) -10.8%, Schwab (NYSE:SCHW) -9.9%.
- Some of what's working in financials: Blackstone (NYSE:BX) +6.7%, E*Trade (NASDAQ:ETFC) +1.2%, WisdomTree (NASDAQ:WETF) +12.3%, Legg Mason +2.8%.
Fri, Jan. 23, 3:06 PM
- It's something Bank of America (BAC -1.6%) hasn't done in more than a decade, writes Deon Roberts - opening a branch in a new market.
- This week, the bank cut the ribbon on a branch in Denver, its first in that state, and BofA says there's more to come. In addition, the bank plans to open its first branch in Minnesota in Q2. It will come in Minneapolis and be followed by other branches in the Twin Cities area over the next two years.
- The moves are particularly noteworthy as BofA is rapidly closing branches in other U.S. markets, but CEO Brian Moynihan is making a point of having retail locations in major markets where the bank is already serving customers and businesses through its U.S. Trust and Merrill Lynch units. “We’ll go to other markets largely just to complete the footprint,” says Moynihan. "You've got to complete the franchise."
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.
Wed, Jan. 21, 12:19 PM
- Bank of America (NYSE:BAC) hired Tim Watson in 2010 to lead its Canadian energy and power investment banking operation, but those services aren't in great demand at the moment thanks to the crash in oil prices, and he's left the firm, reports Bloomberg.
- Previously: Unexpected rate cut for Canada (Jan. 21)
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)
Thu, Jan. 15, 7:26 AM
- The headline revenue figure of $18.73B missed estimates by a wide margin, but included $1.2B in negative FVA and DVA adjustments. Headline EPS of $0.25 missed by $0.07, but those same adjustments lowered EPS by $0.07.
- Consumer and Business Banking net income of $1.758B vs. $1.992B a year ago on revenue of $7.541B vs. $7.496B. Provision for credit losses of $670M vs. $4427M. Noninterest expense of $4.015B about flat from last year. Average deposit balances up 4% to $550.4B. Number of mobile banking customers up 15% to 16.5M, with 12% of deposits done through mobile vs. 9% a year ago.
- Consumer Real Estate Services loss of $397M vs. a loss of $1.035B a year ago on revenue of $1.174B vs. $1.712B. Noninterest expense of $1.945B vs. $3.752B thanks to lower litigation and staffing costs. $11.6B in mortgages and $3.4B in HELOCs vs. $11.7B and $3.2B a year ago.
- Global Wealth and Investment Management net income of $706M vs. $778M a year ago on revenue of $4.602B vs. $4.479B. Client balances of $2.5T up 6% Y/Y.
- Global Banking net income of $1.433B vs. $1.255B a year ago on revenue of $4.057B vs. $4.303B.
- Global Markets loss of $72M vs. a loss of $47M a year ago on revenue of $2.990B vs. $3.816B (after DVA adjustment). FICC revenue of $1.5B vs. $1.9B a year ago, driven by declines in credit and mortgages, partially offset by stronger forex and rates results (similar to what JPMorgan reported yesterday).
- Book value per share of $21.32 vs. $20.71 a year earlier. Common equity tier 1 capital ratio of 10% vs. 9.5% the previous quarter.
- Conference call at 8:30 ET
- Previously: Bank of America EPS of $0.25 (Jan. 15)
- BAC -2% premarket
Thu, Jan. 15, 7:05 AM
Wed, Jan. 14, 5:30 PM
Tue, Jan. 13, 3:21 PM
- 2015 has opened much like 2014, with interest rates doing the exact opposite of what most expected, and falling sharply. It's a tough start for bank investors who have been counting on higher interest rates to help boost earnings for a number of years.
- In the meantime, deposits keep rolling in, and the pace of lending growth isn't quick enough to absorb all the money. In 2014, loan balances rose 4.4%, but securities holdings popped 12%, and cash assets jumped 22%.
- The good part of falling yields are unrealized gains on those security portfolios - negative a year ago, they're were in the green by about $15B on Dec. 31. More good news, says Goldman's Richard Ramsden: Valuations. The big banks are priced at about 9.9x estimated 2016 earnings, allowing for some nice upside if and when rates do decide to go higher.
- Reporting Q4 results tomorrow are JPMorgan (JPM) and Wells Fargo (WFC -0.8%), and on Thursday are Bank of America (BAC -1.4%) and Citigroup (C -0.9%).
Tue, Jan. 13, 12:57 PM
- BofA (BAC -0.1%) has cut ties with about 150 hedge funds in its prime brokerage group, reports Bloomberg, as new capital rules make the business less profitable (on an ROE basis).
- The bank had high hopes for its prime brokerage business after buying Merrill Lynch in 2009. "Hedge fund managers should expect banks to become more discerning in their allocation of equity to support new and existing business - redirecting resources away from businesses that are expected to earn low returns on equity,” said JPMorgan in a recent report.
Mon, Jan. 12, 8:43 AM
- The collapse in oil prices is set to crimp one of the few fast growth areas for banks since the financial crisis - lending to the energy industry. Right now, we're just talking about a slowdown in lending, but Charles Peabody - who saw the losses incurred by Texas banks during the 1980s energy slump - expects the current situation to lead to losses as well.
- "It’s been a hot industry, probably a little too hot,” says Cullen/Frost (NYSE:CFR) CEO Dick Evans, whose bank has a sizable energy business. “But it is not time to panic. We have been in the game a long time. I am comfortable with what we have been doing.”
- The flip side of energy issues might be stronger business for banks elsewhere as consumers find themselves with more money in their pockets after filling up.
- Among the more sizable banks, Scotiabank (NYSE:BNS) leads the way with 34.6% of its investment banking revenue coming from energy companies. Next is RBC (NYSE:RY), with 20.2%, and then Wells Fargo (NYSE:WFC) with 14.9% and Citigroup (NYSE:C) with 11.8%. Others include Barclays (NYSE:BCS) with 10.7%, Credit Suisse (NYSE:CS) with 8.1%, and Bank of America (NYSE:BAC) with 7.4%.
Thu, Jan. 8, 7:50 AM
- The compliance group at Bank of America (NYSE:BAC) now resides inside risk oversight instead of legal. The move comes shortly after BofA officials discussed risk management guidelines with the OCC last month.
- The OCC reportedly pressed for the action on belief the legal group was focused on minimizing the application of rules.
- A bank spokesman said the move was part of BofA's efforts to simplify how it operates after legacy matters have been largely resolved.
Mon, Jan. 5, 1:03 PM
- An improving economy and easing of the regulatory burden will be keys for a big move higher in the big banks this year, says Barclays' Jason Goldberg, seeing double-digit percentage gains for the Citigroup (C -2.9%), Bank of America (BAC -3%), JPMorgan (JPM -2.8%), and Wells Fargo (WFC -2.6%).
- His top pick among the group is Citigroup, where the $65 price target suggests upside of more than 20%.
- Goldman has a different take, and sees the regulatory burden as making JPMorgan worth more broken up than together.
Dec. 31, 2014, 12:23 PM| 12 Comments
Dec. 17, 2014, 4:30 PM
- To review, current global head of FICC David Sobotka - comfortable with the progress the struggling business has made - reportedly set a retirement date for year's end.
- He's to be replaced - reports the WSJ - by Bernard Mensah and James DeMare. Demare has been with BAC since 2008 and is currently head of global securitized products and real estate portfolio management. He'll continue to be based out of NYC.
- Mensah joined BofA in 2010, and currently runs FICC trading for EMEA. He'll continue to be based in London.
- Amid a tough time for FICC action in the banking industry, Bank of America managed to post an 11% Y/Y gain in Q3, though CEO Brian Moynihan has said Q4 isn't looking anywhere near as robust.
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