Bank of America Could Rise 50% or More
After paying out $65 billion in fines, legal fees and restitution, profits will soon start falling to the bottom line.
Like a picnic besieged by yellow jackets, Bank of America's financial results this year have shown appetizing signs that were difficult for investors to fully enjoy. The bank has slashed expenses, built a sturdy capital position, and gradually shifted away from volatile businesses toward stable and lucrative ones. But it has also been swarmed by massive litigation costs. They will sting again in the third quarter but then will quickly begin to clear away. Starting next year, BofA investors will get a glimpse of two things they haven't seen in years: a fairly clean income statement and a decent dividend.
By 2017, earnings per share could hit $2, versus an estimated 75 cents this year. More important, shareholders by then will have seen a string of steady increases in both earnings and dividend payments, with fewer and smaller legal surprises. They could be willing to pay $25 a share by that point, or 12.5 times earnings, versus a recent $17. Add a buck per share in cumulative dividends and BofA stock (ticker: BAC) could return 50% over the next three years, and perhaps sooner.
By 2017, earnings per share could hit $2, versus an estimated 75 cents this year. More important, shareholders by then will have seen a string of steady increases in both earnings and dividend payments, with fewer and smaller legal surprises. They could be willing to pay $25 a share by that point, or 12.5 times earnings, versus a recent $17. Add a buck per share in cumulative dividends and BofA stock (ticker: BAC) could return 50% over the next three years, and perhaps sooner.
Bank of America is the second-largest U.S. bank by total assets, with $2.17 trillion versus $2.52 trillion for JPMorgan Chase (JPM). During the first half of this year, 33% of revenue came from BofA's consumer and business banking segment, which includes the branch system and credit cards; 20% from global wealth and investment management, including Merrill Lynch retail brokerage and U.S. Trust private bank; 22% from global markets, or institutional sales and trading; 19% from global banking, a corporate and commercial segment that includes cash management and payment systems; and 6% from consumer real estate services -- mortgages, mostly, including those from troubled Countrywide, bought in 2008.
FEW BIG BANKS have been hit harder by legal overhang from the global financial crisis than BofA, where litigation has gobbled 30% of core profit since 2013, double the average for peers. Last quarter, the bank reported profit of $2.3 billion, or 19 cents a share, after paying $4 billion in pretax litigation expense, or about 22 cents a share after tax. In August, BofA reached a $17 billion settlement with the Justice Department over mortgage lending, which will bring its total legal tab since the financial crisis to well over $65 billion. Look for another messy report in mid-October, when the bank releases third-quarter numbers. It expects to record a charge of $5.3 billion, or 43 cents a share.
The good news: BofA reckons it has resolved claims on 95% of mortgage securities where claims have been filed or threatened. It probably hasn't seen the end of legal costs; industry-wide scandals related to Libor-fixing and dodgy currency exchange have yet to be resolved. But BofA's exposure there is limited. Starting in the fourth quarter, profit statements could once again begin to be dominated by, well, profits. And therein lies more good news.
"There's a lot of talk about when earnings will get back to normal," Chief Executive Brian Moynihan told Barron's this past week. "But we're already seeing rising profit in most of our core businesses, offset by legacy costs." To his point, core, pretax profit for four of BofA's five businesses hit $8.5 billion in the second quarter, up from $6.8 billion two years prior, offset by a $4.5 billion loss from the mortgage business. The mortgage business has been weak of late, but even so, the lending portion of that business lost just $56 million after taxes last quarter. The rest came from something called legacy assets and servicing -- a separate reporting division set up after the financial crisis to handle delinquent mortgages.
There, steep losses have come from litigation and the high cost of chasing paperwork, modifying loans for some borrowers, foreclosing on others, and so on. But litigation costs should plunge next year. Non-litigation expenses are already tumbling -- to $1.4 billion last quarter from $2.3 billion a year earlier. A year from now, those expenses could drop to $500 million per quarter. Eventually, the legacy division will be folded back into the mortgage segment.
"THE STOCK PRICE DEPENDS on market sentiment," says Moynihan. "Our job is to drive fundamental shareholder improvement. We've increased book value while massively reducing risk." That has meant cutting debt and increasing capital and liquidity in recent years, but also focusing more on dependable sources of profit. In a note earlier this month upgrading BofA shares to Buy from Neutral, Goldman Sachs pointed out that, looking beyond litigation costs and other one-time items, BofA has had the largest reduction of earnings volatility of its peers in recent years, and the stablest trading revenues since 2013. Better earnings stability and higher dividends have helped Wells Fargo, for example, fetch a premium stock valuation of 1.7 times this year's estimated book value, versus 0.8 times for BofA. As steadier earnings for the latter begin to shine through, its discount should narrow.
A bigger dividend should help. BofA pays peanuts today, but as its excess capital swells, payments should rise quickly. The Street predicts 55 cents a share by 2017, or 3.2% of today's price.
ONE WAY BofA has grown profit in recent years is to simplify business lines and slash billions of dollars from costs. Credit-card products have been reduced from more than 20 to three, even amid solid growth in new accounts. Branches have been trimmed by 1,000, to about 5,000, with more cash machines added to remaining banks. Mobile banking is growing much faster than branch banking, which is good for the bottom line because a mobile transaction costs the bank 15 or 20 cents versus $5 for a branch visit, according to RBC Capital Markets.
Cost-cutting is no substitute for revenue growth, of course, but Wall Street predicts BofA's revenues will grow by mid-single-digit percentages over the next few years. It won't need to find many new customers. The bank points out that its customers have $8 trillion in balances elsewhere. "Cross-selling is becoming more and more material to the growth of our company," says Moynihan.
Rising interest rates could boost earnings, as well. The Fed is widely expected to take rates higher beginning next year. Banks make money by borrowing cheaply from depositors and lending at a profit. In the current environment of ultralow rates, the spread gets squeezed because interest rates on savings accounts can fall only so far. BofA estimates that a rise in rates of one percentage point across the board would lift its bottom line by $3 billion before taxes.
Goldman notes that while consolidation has already run its course among big U.S. banks, remaining players are moving out of business lines where their share is low and focusing on ones where they dominate, which has the same effect as mergers: reducing competition and driving profits higher. It sees BofA as underowned; its weighting in mutual funds relative to its weighting in the Standard & Poor's 500 index is the second lowest among 25 large financials, ahead of only Berkshire Hathaway (BRK.B).
Bucking the trend among mutual funds is Randy Dishmon, manager of the Oppenheimer Global Value fund. BofA is among his largest holdings. "People don't understand the transformation that's taking place there," he says. His upside prediction tops ours. The share price, he says, could nearly double in three years.
0 comments:
Publicar un comentario