The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Summary
- Bank Of America has panoply of positive catalysts on the horizon.
- These catalysts combined with the bank putting its mortgage litigation woes behind it should spur the stock higher.
- Even so, headwinds remain. Nevertheless, with the Republicans taking control of the Senate, is the worm finally about to turn?
Overview
Bank of America (NYSE: BAC) shareholders have been on a rollercoaster ride over the last year. The stock has been highly susceptible headline risk related litigation. In fact, the company just had one more negative headline hit the wires just last week. Even so, it appears as though the worm may have turned for Bank of America.The latest on litigation risk
The bank restates earnings
Bank of America last week announced it was restating its results owing to alleged rate manipulation. The bank revealed $400 million of foreign-exchange related charges due to its engagement in advance talks with the regulators to settle the allegations. The additional charge increased Bank of America's net loss to $232 million from $70 million last quarter. Even so, there is no assurance a settlement will be reached. The lead may have been buried with the company lowering its estimate of maximum probable losses from legal issues exceeding present reserves from $5 billion to only $3.1 billion. I see this as great news. Hopefully, we can finally begin to focus on business as usual for the bank.
The $16.7 billion settlement is held up
The $16.7 billion settlement purportedly agreed to in August is being held up over waiving additional sanctions set to kick in when the deal is entered in court. Political pressure is mounting that lawmakers have been too soft on the big banks. In the past, banks have typically been granted three key waivers when settling cases. The most important wavier is related to a ban on managing mutual funds. The key waiver would allow it to continue seeking investors for private firms like tech companies which haven't yet gone public. The waivers are often one of the reasons financial firms decide to settle cases rather than go to trial. Commissioner Luis Aguilar stated,
"The commission and its staff should not be in the business of rubber-stamping and approving all waiver applications simply because a request is made."
I see this as a non-issue. The settlement is already agreed to. Bank of America will receive the waivers it needs. The nature of the governmental regulation is that of a pendulum, it swings.
With Republicans in charge, expect regulations to loosen
Loose regulations regarding mortgage loans led to the housing debacle of 2008. In the aftermath, the regulations became so strict that only a very small percentage of the public with perfect credit and large down payments could get a mortgage. Bernanke getting denied for a mortgage has put the spotlight on this fact. This process may be expedited with the Republicans regaining the majority in the Senate and in early November. This should underpin the US housing market going forward and subsequently the bank's bottom line. In fact, the bank recently declared a dividend.
Bank of America declares dividend
Bank of America declared a $0.05 per share quarterly dividend. The forward yield is 1.20%. The dividend is payable December 26th for shareholders of record December 5th, ex-dividend date December 3rd. This may not seem like much, but it's actually a huge step forward for the company. I expect dividend growth to become a factor to consider going forward. The company's fundamentals are poised to improve substantially over the next year.
Fundamentals improve
According to the most recent quarterly report, the bank continues to improve in several areas. The following is a list of the major highlights in the report. You can read the transcript here.
- A majority of business segments reported higher net income year-over year.
- The bank originated $14.9 billion in residential home loans and home equity loans in the third quarter.
- The bank issued more than 1.2 million new credit cards in the third quarter.
- The bank's Global Wealth and Investment Management division reported record revenue and record earnings.
- Non-interest expense, excluding litigation was down $1.1 billion year over year to $14.2 billion.
- Credit quality continued to improve with net charge-offs down 38% year over year to $1.0 billion.
- The bank's tangible book value per share increased 4% year over year to $14.13 per Share.
EPS Growth projections
A company's earnings per share is conceivably the most important statistic to understand before investing in a stock. Each time you consider starting a position in a stock, you should prudently scrutinize its earnings information. The reason earnings are so vital to investors is that they tell you about the relative profitability of a company. With litigation expenses firmly in the rear view window, EPS is expected to jump by over 200% next year according to Finviz.com. This should allow for extremely favorable incremental comparisons going forward.
The stock is fundamentally undervalued on a historical and relative basis
The stock is trading for a price to tangible book value of 1.1 versus the industry and peer average of 1.5. This implies the bank may have 36% upside from current levels. The stock has a forward P/E of 11.67.
(Source: Scottrade.com)
Technical situation looks positive
The stock is up 5% for the month and 15% for the quarter. The stock is in a definitive uptrend and recently achieved a strong Golden Cross where the 50 day SMA crosses above the 200 day SMA. A prerequisite for me prior to starting a position is to ensure the stock is not in a precarious technical situation. Bank of America's stock looks solid from a technical perspective.
(click to enlarge)
(Source: Finviz.com)
Downside Risks
There are multiple downside risks for Bank of America going forward. Bank of America needs to stay on top of cost cutting efforts to ensure it continues to improve in all areas. Current macroeconomic and geopolitical issues in Europe remain a concern. The US housing market will need to stay on track. Nonetheless, with the overhang of litigation risk subsiding, I see Bank of America shares moving higher in the future.
Conclusion
I am bullish on Bank of America in the long run. The bank's legal issues seem to be coming to an end. Blue sky lies ahead for shareholders. Furthermore, the bank has shown numerous areas of improvement. Bank of America did announce a common stock dividend of $0.05 per share. I propose these factors coupled with the bank's improving fundamentals will underpin the stock going forward. The worm may be about to turn for patient shareholders. I feel we are at a significant inflection point right now. There is still some uncertainly holding the stock back currently. This is the perfect time to buy Bank of America before it completely breaks out. Nevertheless, I would still layer into any position as the market seems extremely volatile at this time.
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