Big banks are enjoying some heavy media attention lately as they power through Fed-induced stress scenarios designed to test their strength and mettle. The cause of some of the most intense tongue-wagging is Bank of America Corp (NYSE:BAC), as droves of analysts weigh in on the question of the day: Will the nation’s second largest bank finally be able to pay out a decent dividend?
There’s no doubt that there is strong interest in B of A right now, and investors drove the share price back up above $12 in the hours before the stress test results were released.
1. Valuation. Using the most recent quarterly data, Bank of America currently trades for about 60% of book value, compared with the industry average of 95%, and a tangible book value of 95%, versus a 133% average. Compared to JPMorgan Chase & Co. (NYSE:JPM)‘s 98% and 140%, Bank of America looks like a bargain.
2. Earnings. Well, OK, they’re not great, but this is an issue of which CEO Brian Moynihan is acutely aware — and is trying to turn around. He has acknowledged that Bank of America Corp (NYSE:BAC) has been lax in the mortgage lending department and has taken steps to increase that lucrative activity. Doubtless, JPMorgan and Wells Fargo & Co (NYSE:WFC)‘s impressive revenues from mortgage origination didn’t escape his notice.
3. CEO Brian Moynihan. History shows that Brian Moynihan is exactly the type of leader that Bank of America needs to pull it out of the melancholy it has been experiencing. It’s been done before, and in my opinion, Moynihan will the guy to do it once again. Not to mention that great hair.
4. B of A is working its way out of the mortgage muddle. Bank of America made a Herculean effort on this point within the past year, settling past and future put-back issues with Fannie Mae, as well as other mortgage-based claims — including one regarding shabby foreclosure practices, signed onto along with fellow miscreants JPMorgan, Wells, Citigroup Inc. (NYSE:C), and Ally Financial Inc (NYSE:GMA). Of course, the threat of more lawsuits hangs in the air, but progress has definitely been made.
5. Delinquent mortgages are down. In the bank’s fourth-quarter earnings transcript, management noted that 60-day delinquent loans have decreased, and the bank expects that trend to continue throughout 2013.
6. The bank is slimmer than ever. Moynihan’s selling off of non-core assets has so far netted the bank a cool $60 billion, about $12 billion of which has gone toward building capital reserves.
7. Capital reserves are higher than most in the industry. Moynihan has so far pushed his bank’s capital reserves to new heights – 11.1% for the Tier 1 Basel I ratio, and 9.3% for Basel III. Only KeyCorp (NYSE:KEY) has higher ratios in both categories.
8. B of A is trying to improve customer relations. This issue is a real stickler, and it will take time to get the new customer-friendly initiative off the ground. But Moynihan is making a valiant effort, and I’m certain results will follow.
