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Analyst raises view of BofA; shares rise sharply
Bank of America Corp. shares surged Monday as Goldman Sachs analyst Richard Ramsden upgraded his rating on the bank to "Buy" and added it to a special list of top picks.

In upgrading the stock and adding it to the "Americas Conviction Buy List," Ramsden gave two reasons for his upgrade: the bank's operating profits should help offset rising loan losses, and potential dilution to current stockholders is likely to be less than expected.

Shares of the Charlotte, N.C.-based bank rose $1.28, or 11.9 percent, to $11.94 in late morning trading. Shares have traded between $2.53 and $39.50 during the past year.

Ramsden increased his 12-month price target to $15 from $7.

The government recently released the results of "stress tests" it ran on the nation's 19 largest banks to determine if they would need additional capital to protect against losses should the economy worsen. It determined Bank of America would need an additional $33.9 billion, more than any other bank reviewed. Since then, investors have been concerned about stock dilution.

Bank of America launched a plan to raise capital through asset sales and stock offers. In the research note, Ramsden said Bank of America is likely in the middle of raising $8.5 billion in new capital through the issuance of common stock, selling portions of the shares each day until it hits its targeted capital goal.

It will likely then offer to exchange preferred shares for common stock to raise another $8.5 billion, Ramsden said. Uncertainty about exactly how many shares that would add, and thus dilute current stockholders, had weighed on the bank since it announced its capital raising efforts, he added.

With those efforts nearing an end, removing that uncertainty helps provide assurances to investors buying shares. Ramsden estimates Bank of America's share count will increase to 9 billion shares from about 6.4 billion, implying 30 percent dilution.

Bank of America will also benefit from continued strong business during the second quarter. Ramsden said capital markets and mortgage banking revenue have remained strong, though likely not as good as they were in the first quarter.

Ramsden estimates capital markets operations will generate $6 billion in the second quarter, while mortgage banking revenue will total $3 billion.

He projects Bank of America will earn 25 cents per share during the second quarter. Analysts polled by Thomson Reuters, on average, forecast earnings of a penny per share for the quarter.

Better-than-expected earnings in the coming quarters can be used to help cover the $33.9 billion shortfall projected by the government.

Ramsden cut his full-year earnings estimate to 85 cents per share from 90 cents per share to account for share dilution. Analysts forecast Bank of America will earn 48 cents per share for the full year.

http://www.businessweek.com/ap/financialnews/D988NQT80.htm