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So Wall Street finally got a peak this morning at Bank of America (NYSE: BAC)'s fourth quarter earnings, and guess what? Bank of America missed, reporting 5 cents earnings per share versus the 18 cents estimate. Frankly, I'm glad BAC missed. Why? Because Bank of America looked at everything on its books, and if it wasn't moving, it wrote it down or wrote it off. Bank of America is now the clear leader of the American financial institutions.
Bank of America went into the entire credit crisis and sub-prime mess with the best positioned in-house mortgage portfolio. Bank of America and Wells Fargo (NYSE: WFC) were nowhere near the poor position of Citigroup (NYSE: C) or Merrill Lynch (NYSE: MER). Wells Fargo and Bank of America typically kept and serviced most of their issued mortgages. They also had higher credit requirements from their respective customer base. Of all major banks, these two will exit the storm in the best shape.
When the world comes back to normal, Wells Fargo and Bank of America will own and dominate the mortgage sector. Of course, with the Countrywide Financial (NYSE: CFC) proposed acquisition, Bank of America will have the largest portfolio of mortgage loans -- not SIVs or CDOs, which are Citigroup and Merrill Lynch's persistent problem -- by a factor of three.
Bank of America's CEO Kenneth Lewis stated he was comfortable with earnings per share exceeding $4 this year -- at the minimum. The current dividend of $2.56 providing a yield of 6.9% is extremely attractive. With the Federal Reserve cutting rates, yields on money market funds, six-month CD's and the like are coming down. A 6.9% yield with a near two-to-one earnings coverage, is money in the bank (pardon the pun!).
Bank of America's risk/reward profile is very appealing. At $38-39, the two-year upside in the stock is $20, before the 6.9% dividend.
Countrywide Financial comes with its own set of risk, but Bank of America is not closing on the deal until the third quarter. Bank of America is sitting in the driver's seat as the firm can re-do the terms if it feels the risk profile of Countrywide is up. But remember, once the dust settles, bank of America can expand its already envious portfolio to more than twice its size via an inexpensive acquisition.
The stock is a buy if you exercise a bit of patience over these next two years, but the rewards can be huge.
Georges Yared is the CIO of Yared Investment Research and the author of Baby Boomer Investing...Where do we go from here?
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Reader Comments (Page 1 of 1)
1-24-2008 @ 3:34AM
Gumby said...
I think bank stocks is getting much riskier as more and more rednecks will try to pull ATMs off with their pickups in the future...
1-22-2008 @ 2:26PM
JP said...
Disagree... with its recent deal to buy CFC, BAC still has far too much uncertainty to sustain its price. Much of the loan origination volume of the past 3-5 years that roiled the stock market in 2008 belongs to CFC. Option ARM's: it's how they surged to become the market leader. It lowers your payment in the short-term, and drives you to foreclosure in the long-term. The possible litigation BAC can incur with the merger deal can bring the company to its knees. They were better off waiting for CFC to go BK, and I they should be hoping for a regulatory hault to avoid the merger.
1-22-2008 @ 3:01PM
dalelama said...
The only fly in the ointment is future consumer loan losses on their unsecured book as the economy slows...
1-22-2008 @ 3:01PM
dalelama said...
what about rising unsecured credit losses as the economy slows...
1-23-2008 @ 7:50AM
Timothy E. Hall said...
What type of unsecured credit losses are you referreing to?
1-23-2008 @ 7:49AM
Timothy E. Hall said...
BAC has made some very important acquisitions to fill out its book of business. These acquisitions have been expensive, but well worth the price paid. Countrywide brings its own set of challenges, but over time, the challenges will be dealt with well and BAC will have a very large market share in the mortgage market. BAC is a customer driven bank and shore fare very well.