BANK of AMERICA: A Risky Bet That May Be Worth It - Barron's (14 comments}
by: SA Editor Rachael Granby March 07, 2009
BANK of AMERICA (BAC) is trading near $3, down from $37 a year ago, and the bank is taking a beating over Merrill Lynch's larger-than-expected losses. But Bank of America could be a home run, writes Barron's Jacqueline Doherty, if it can avoid Citigroup's (C) fate.
Critics say BoA, like Citi, will have to boost its capital base by converting preferred shares to common, diluting common stock shareholders. The government's 'stress tests' can't bring much good news for the bank either. But BoA can still turn itself around.
BoA's tangible equity ratio is 2.68%. CEO Ken Lewis says regulators would like to see that number at 3%, a goal he feels the bank can reach by the end of the year. Assuming total assets remain unchanged, BoA would have to raise its equity base by $8B; BoA plans to get there through a combination of retained earnings, asset sales and shrinking its balance sheet. "It's our earnings power that people are missing," says Lewis. "We can absorb a lot of [hits] and still be profitable."
The bank could generate over $100B in revenue this year after mark-to-market write-downs. Despite problems at its credit card unit, Merrill and elsewhere, Lewis claims BoA will be profitable this quarter and for all of 2009 unless things get significantly worse. (Analysts expect BoA to lose $0.01 per share in Q1, and earn $0.57 this year.)
BoA's Tier 1 capital ratio is 10.6%, well above the 6% regulators usually deem adequate. And when the economic crisis passes, BoA shareholders could benefit from something the crisis forced: a massive buildup in BoA's loss reserves. As of the end of 2008, those reserves stood at $23.5B, almost double the level from the year before.
Barron's warns that "anyone buying BoA shares is making a home run-or-strikeout bet, not an investment." Even so, "the bank's chance of passing regulatory muster may be better than the bears say." While some of the forecasting might be iffy, BoA makes a decent speculation at less than $3.25.
