"Compelling valuations and improving fundamentals mean that 2011 could be a strong year for shares of the biggest U.S. banks," suggests Elliott Gue.
"Bank of America suffered mightily during the financial crisis of 2007-09. Not only were the bank's legacy loan portfolios hit hard by delinquencies and charge-offs, but the company also assumed additional liabilities and credit risk when it acquired Countrywide Financial and Merrill Lynch.
"The firm lost money in the fourth quarter after taking a laundry list of exceptional charges, many of which stemmed from legal costs and losses related to putbacks of faulty mortgages.
"Over the past year, mortgage bondholders have stepped up repurchase requests on underlying loans that lack the necessary documentation or were serviced improperly.
"But bearish commentators exaggerate the risks associated with putbacks. In early January, the bank agreed to pay $2.8 billion -- a fraction of what many had predicted -- to settle repurchase requests from Fannie Mae and Freddie Mac.
"Management estimates that the bank will spend a total of $7 to $10 billion resolving putbacks.
"Further clarity on mortgage buybacks should help investors come to grips with this risk, while improving credit metrics should enable Bank of America to release excess reserves intermittently throughout 2011.
"Last year, declining net charge-offs prompted the bank to release about $7 billion worth of cash held against bad debt.
"In 2010 Bank of America managed to grow its deposit base by almost $19 billion, to more than $1 trillion. The bank's commercial and industrial loan portfolio also increased by $3.2 billion in the fourth quarter.
"Bank of America's credit card business is on the mend as well, thanks to a recovery in consumer spending and declining delinquencies and charge-offs.
"Although regulatory reform has affected this business line's profitability, the company has adjusted well to the changes.
"The nation's largest bank repaid all of the loans it received from the Troubled Asset Relief Program, and the firm should be able to meet tougher capital requirements without issuing additional shares.
"Management has also hinted that improving profitability could open the door for a potential dividend increase. Bank of America is a buy under 16."
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