Bank of America was on the brink of Bankruptcy just a few
years ago. Under prior management, growth in assets was pursued at the expense
of sounds business practices. This combined with years of poor underwriting and
the disastrous loans that came with the acquisitions of Countrywide Financial
and Merrill Lynch, caused huge damage to the franchise. To this day Bank of
America remains one of the most shorted stocks on the NYSE.
However, the problems BAC has faced are temporary. Brian
Moynihan became CEO in 2010 and has made it a priority create a “fortress”
balance sheet and clean up their legacy issues. The underlying business is very
high quality and is producing 13-15% ROTE. The high earnings power of the
underlying business is being clouded by a very high expense rate, high
litigation costs, mortgage put backs, high cost long term debt, etc. These
issues are quickly being resolved. I expect by 2014-2015, Bank of America will
be mostly finished taking care of the financial crisis related issues.
Bank of America is currently one of the best capitalized
banks in the United States. Their capital levels are already in excess of the Basel
3 requirements that come into full effect in 2019. Basel 3 requires them to be
at a tier one common equity ratio of 8.5% by 2019. At the end of the 3rd
quarter they were already at 8.97%.
At today’s price ($10) Bank of America is selling at one of
the widest discounts to its tangible book value ($13.50) in its history. By
2015, I expect BAC to be earning in excess of $30 billion/ year pre-tax and
potentially well in excess of this. At this level of earnings, Bank of America
is worth at least $25 per share. In addition, in 2013 alone Bank of America
could return up to $18 billion to shareholders based on Brian Moynihan’s statement
during the 3rd quarter conference call where he indicated that
nearly all capital going forward will be returned to shareholders.
