8/23/2011 1:01 PM ET|
What’s B of A's problem now?
But I'd put them in the category of the tobacco lawsuits -- a huge but essentially "one-off" issue that will pass in time. Big legal claims against tobacco companies tanked their stocks in the 1990s but faded as a concern as suits were resolved and underlying demand for the product did not go away. I think it will be the same with the banks.
"This creates an earnings head wind, but it is not something that will lead to solvency issues," says Nancy Bush, a former Wall Street bank sector analyst who is now a contributing editor at SNL Financial. While she thinks it may take three years to resolve the legal issues, the effect on the stock could wear off much sooner. "We believe they have enough capital and earnings power to handle it," says Lentell.
Bank of America just took a $21 billion charge largely related to mortgage issues, which may well have been the bank's "big bath." Morningstar analysts expect an additional $7 billion in charges from here. "There won't be the same magnitude of surprise, but it will be an issue that stays with us for several years," predicts Bush.
Note that Citigroup and JPMorgan have much less exposure to this risk -- so any drag on their stocks from the housing mess could ease sooner.
The double-dip dilemma
The more serious worry, of course, is that the economy slips into a double-dip recession -- bad news for Bank of America and its banking brethren sectorwide. Banks would all face higher losses on mortgages, credit cards and commercial loans. Plus, lending would dry up even more.
But a lot of experts still think we may avoid another downturn. Yoshikami puts the odds of a recession at 30% if Europe is able to stabilize its financial crisis. He cites recent relatively decent U.S. jobs numbers and solid corporate earnings. Plus, falling oil prices, low interest rates and a weak dollar all act as stimuli.
ISI Group's Ed Hyman, one of Wall Street's most well-regarded economists, also rules out a recession in the U.S. He expects 2.5% growth in the U.S. in the second half of this year.
If the worst happens, though, these three big banks are all in a much better position, financially, to weather these storms than they were during the last crisis. Bank of America has been making particularly good progress.
- Total reserves, which are set-asides against potential losses, were at $37.3 billion in the second quarter, compared with $29 billion in the first quarter of 2009, according to SNL.
- Tangible common equity, a common measure of financial strength, stood at $125.4 billion at the end of the second quarter of 2011, compared with $65.7 billion at the end of 2009, says SNL.
- And it has $400 billion in cash. "Just think about the sheer amount of capital, the sheer amount of liquidity we have, over $400 billion," Moynihan told investors earlier this month. "Our capital levels are among the highest they've ever been. They're sufficient to run the company, even after we took $20 billion (in charges) in the second quarter."
Bank of America's key strength is that it's a dominant player in retail banking, with a strong presence in high-growth states like Texas. Through its vast nationwide network of 5,800 branches, it has $1 trillion in deposits. "The strength of Bank of America is its core funding," says Isaac. "Its liquidity is strong. I don't believe there is any possibility at all that Bank of America is so overwhelmed by its troubles that it fails."
Next, despite all the problems its acquisition created, Merrill Lynch is a profit machine for B of A, contributing to $35 billion a year in earnings before taxes and provisions for bad loans. "That gives them substantial ability absorb future losses," says Lentell. That's one reason he doubts the bank will have to raise more capital, a current fear among investors.
All the Big Three, in fact, seem better prepared for a crisis than the last time around. Goldman Sachs analyst Richard Ramsden estimates that 35% of the assets at Bank of America, Citigroup and JPMorgan Chase are liquid, meaning they are in cash or readily convertible to cash, compared with 27% in late 2007. And core deposits make up 54% of funding, compared with 43% in 2008. "The current environment is not 2008 all over again," Ramsden wrote in a recent note.
Despite these kinds of assurances, Bank of America and Citigroup trade now at about half their tangible book values of $12.65 and $48.75, respectively. And JPMorgan, at $34 a share, is closing in on its tangible book value of $31.52.
Appetite for risk
So does all this mean you should rush out and buy B of A, or any of the big banks, on this dip? Not quite.
Peter Kolvaski, who manages the four-star rated Alpine Dynamic Financial Services Fund (ADFSX), is holding off on buying. He thinks they could fall more, as investors anticipate a double dip that may yet happen. Yet he sounds bullish.
"There is potential for very substantial percentage increases in these stocks as they bounce off the bottom here, but I don't know when that will be -- this month or two months down the road. Between now and the end of the year, there could be more volatility," he says. "But fundamentally the U.S. banks are stronger today than they were two years ago, yet the valuations are not that much higher today."
Likewise, Yoshikami is not adding to his Citigroup position now, and he isn't ready to buy the two other big U.S. banks. He'd rather wait for more clarity on Europe."I would rather lose a little upside to get more certainty. It's a matter of how much risk you want to take."
This suggests a strategy to me. The big banks are safe to buy, and in fact look cheap because their financials have solidified. But risks remain, and as long as bank stocks are falling faster than the market, there's no rush. You can wait and still beat the crowd.
At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column. He has suggested that readers of his investment newsletter consider buying Bank of America and Citigroup.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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They deserve everything ill that happens to them. Even today they still hold on to large reserves and refuse to loosen credit in spite of the monies afforded these greedy mongrels. They'll probably have the audacity to ask for another bailout.
Sooner than later American greedyations will realize that downsizing to regain profits and working their employees to death is done. You can't squeeze water from a rock, or blood
from a dollar.
It's time to produce, and to produce goods and services that the WORLD really needs.
It's time to end NAFTA and bring American manufacturing jobs home. Period!
All I know is that I own BOA stock. I am not happy with the performance and will be voting against the Board of Directors when the time comes.
They took bail-out money, our tax dollars. They are part of the reason we are in the mess we are in. They were giving loans to anyone, even if they did not qualify. That is one of the main reasons we are in the shape we are in. They are greedy jerks.
Another big reason we are in the shape we are in, is because of Congress. We should limit Congresses terms and power.
Said it before.. I'll say it again.
4.4 BILLION dollars in just BONUSES paid to the top PIGS at BOA in 2010. Not salaries, dividends... BONUSES.
Average of $440,000 per employee who received a bonus.
And they have to let 3500 people go? Why? They are not cash starved if they can pay out 4.4 BILLION dollars in bonuses last year.
Do you realize that 4.4 BILLION dollars would provide JOBS for 10,000 people at $44,000 a year for 10 YEARS. And they paid that in BONUSES to their top PIGS last year.
I left BOA. I got tired of getting $.03 in interest each month on an account with $3500 in it while they gave all of their money (that they won't LEND to ANYONE) to their FAT PIGS. Credit Union is paying me $.82 per month on the SAME MONEY. Yes, don't look at the "WHOA, a whopping 79 cents per month." Look at the 2700% MORE in interest they pay.
FAIL BOA. FAIL BOA. FAIL BOA.
If I file bankruptcy, I lose my assets (house). If BOA files bankruptcy, do they lose THEIR assets (mortgage holdings?)
BOA sick and a good buy>
the Article shoud have been
BOA IS Sick and Good-bye!
Just remember some of us did not want our tax dollars given to bail out the banks... that was someone elses idea. They should have let them die in 2008. Others will take their place and hopefully would have learned from BOA mistakes.
Now that they are down and out looking for another hand out its time to think... they wasted and abused the last hand out, let's give them the axe and get on with it
Two words.. Community Bank. I switched about 5 years ago and will never go back to one of the big boys. Lower fees, friendlier staff, and WOW a bank that actually cares about their customers, and actually makes loans to people and small business. What novel concepts!!
B of A is the leader in fees charged to their customers, the pound the little guy while giving their executive people outrageous perks, let them fall completely the country would be better without them- USE YOUR LOCAL CREDIT UNIONS THERE FAR BETTER FOR SERVICE AND BANK FEES!!
B of A remains very exposed to risky home mortgages and a weak real-estate market.
Here’s what’s happening two blocks down the street I live on. A seven year old 3,000 sf home overlooking the 8th fairway of a beautiful golf community was just abandoned by its owners who recently purchased a nearby condo for cash. As you probably guessed, it’s a strategic default. The home is underwater and the owners have lost all faith that its market value will ever again meet or exceed their mortgage balance. You probably also guessed that the holder of the mortgage is BAC. Now, I get to watch the weeds grow in the yard and the home fall into ruin as BAC dances around for 18 months trying to collect on their loan; a process which will eventually result in foreclosure and a fire sale of the property, depressing home prices throughout my entire community. In other words, now BAC’s problem is my problem too. Thanks BAC. Thanks Mr. Dirt-Bag neighbor. Thanks to everyone who is dumping their financial problems on those who followed common sense money management and basic principles of finance and who are now paying the price for those who didn’t.
It could not have happened to a more deserving corporation. The Bank that F#@KED America! Basically BFA was found guilty of causing the housing crash after receiving a massive government bailout to cover their losses during the crash that they caused. Nice...
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