Wednesday, 15 January 2014

Lots of trends going right for Bank of America but has the market discounted much of it already?

Bank of America shares have been on a bit of a tear since the last time I wrote about them in October last year. 

So, following the rather mixed JPM and Wells Fargo numbers yesterday (see here and here), can Bank of America's own Q4/FY disclosures help justify the share price uplifts shown above?

Well the headlines are good, with numbers ahead of hopes, a 4% net interest income rise year-on-year and noninterest income up 28% driven by every division (apart from its real estate one where mortgage originations are down over 40%). 

Underneath the headlines there are good and less good indications.  Expense cutting is good, deposits continue to build up and credit provisions continue to fall.  The chart they included on home loans asset quality does make some interesting reading, with allowances for loan losses down from 4-6% a year ago to 0.6% or less today.  That is a pretty big shift. 

One fly in the ointment though was that litigation expenses more than doubled to just over US$2.3bn during the quarter.  Why is this?  Well, we should not forget this chart - I was just listening to Jack Welch on Bloomberg TV give a view that Bank of America's issues in this area were not over.  I would tend to agree.  That Countrywide purchase a few years ago still lingers...

And valuation?  Book value has built over the quarter and return on equity has edged up.  Put the two together (0.72 * 20.71 = 14.9) and the current share price of getting on for US$17 is telling you that investors are highly optimistic about the future for the company.  A view augmented by the company buying back US$1.4bn worth of shares at an average price of US$16.1 during the quarter. 

The conference call has just started and the CEO was quoted that the company has not yet reached its full potential, assisted by the improving net interest income line amongst other things.  This may well be true...but with the credit side materially improved, a share price discounting some of the hopes for 2014 and the hard-to-quantify risk on the mortgage side, I remain on the side for now.  The share should be looked at again in the US$15s but not before.

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