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Bank of America: A Glass Half-Full (or Empty) Stock

By    |   Tuesday, 17 April 2012 11:39 AM

Bank of America (BAC) is definitely a glass half-full (or empty) stock. It has made huge strides since the horror of the credit crisis, snatching up major new business lines during the crash. Nevertheless, it faces a tough row to hoe as the U.S. housing market appears to bounce around near its latest potential bottom. Whatever happens next is probably more a matter of the ultimate resolution of the housing problem than the performance of a single stock.

Bank of America is a bank holding company and a financial holding company based in Charlotte, N.C. It is one of the world’s largest financial institutions, serving individual consumers, small- and middle-market businesses, institutional investors, large corporations and governments with a full range of banking, investing, asset management and other financial and risk management products and services.

The bank has six major business segments: deposits, card services, consumer real estate services, global commercial banking, global banking & markets, and global wealth and investment management. At the end of 2011, the bank had 282,000 employees.

During the credit crisis, the bank took over the Wall Street investment firm Merrill Lynch. It also bought mortgage lender Countrywide Financial.

One of the major problems the bank faces going forward is the resolution of the mortgage-loan overhang as a result of the collapse in U.S. housing. At the end of 2011, the bank estimated that the bank and its Countrywide unit had “sold approximately $1.1 trillion of loans originated from 2004 through 2008” to government-backed lenders (known as GSEs), including Fannie Mae and Freddie Mac.

“In addition, legacy companies and certain subsidiaries sold loans originated from 2004 through 2008 with an original principal balance of $963 billion to investors other than GSEs,” the bank told investors in a recent filing.

“The amount of our total unresolved repurchase claims from all sources totaled approximately $14.3 billion at Dec. 31, 2011. The total amount of our recorded liability related to representations and warranties repurchase exposure was $15.9 billion at Dec. 31, 2011.”

Of course, if the housing market falls further, things could get worse for Bank of America and other major banks caught up in the aftermath. Nevertheless, the bank reached an agreement to settle investigations by the Department of Justice and 49 state's attorneys into lending practices during the boom.

Bank of America is a $94.34 billion market cap stock in a sector in which its average competitor is just $6.96 billion in size. Its trailing 12-month P/E is not measurable (that is, negative). Its projected 12-month earnings per share growth is 51.43 percent, more than double the sector average.

Wall Street projects that Bank of America will earn 12 cents per share when it next reports. Analysts believe the bank can finish 2012 at 70 cents per share for the full year.

Meeting expectations

Unsurprisingly, considering the environment, analysts are mixed on Bank of America. RBC Capital Markets has an outperform rating on the stock, and Sandler O’Neill and Raymond James are in the buy camp. Thomas White International believes the stock will underperform, although many institutions are neutral on BAC.

“The company’s latest interim earnings were in line with analysts’ expectations. BoA’s earnings for the year 2012 are projected to advance strongly,” said the analysts at Thomas White International on April 13.

Bank of America next reports on April 19.

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Tuesday, 17 April 2012 11:39 AM
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