Bank of America shares are cheap

We do not believe that the bank's troubles, even when combined with the European debt situation, warrant the current market price.

By Trefis Dec 2, 2011 2:52PM
Investors have been watching Bank of America (BAC) closely recently, concerned about the quality of its mortgage portfolio, its numerous lawsuits and its need to raise additional capital to meet stringent regulatory requirements.

The bank's stock has shed nearly two-thirds of its value since the beginning of the year. And while much of the decline is indeed justified, we do not believe that the bank's troubles -- even combined with the European debt situation -- warrant the $5.74 price the stock was trading at Friday afternoon.

We recently revisited our forecasts for the bank and revised our price estimate for the bank's stock from $11 to about $9, which is still a healthy 60% above the market price. We attribute this significant difference to the extremely pessimistic market sentiment toward the banking sector in general –- as evidenced by declines in the stock prices of Citigroup (C), Goldman Sachs (GS) and Bank of America in particular. Below we explain the rationale for the revision in our price estimate for the bank.

See our full analysis of Bank of America


Mortgage business expected to drag on value


Bank of America is one of the largest mortgage lenders in the country, and it significantly bulked up its mortgage business right around the time of the 2008 economic downturn with the acquisition of Countrywide. Any benefit this deal may have promised back then has been completely eclipsed by the poor quality of its mortgage portfolio.


Bank of America's mortgage charge-offs for the period from 2008-2010 were nearly $27 billion with the figures for the first three quarters of 2011 standing at more than $6.5 billion. These write-offs are expected to continue for quite some time in the future. In order to be able to better understand the exact impact of these write-offs on the bank's valuation, we have incorporated a new driver in our analysis that captures the provisions for losses as a percentage of loans outstanding.


Bank of America Provision for Losses as percent of Mortgage Earning Assets

Shrinking sales and trading margins


Extremely volatile global capital markets hit trading revenue at all global banks last quarter. Uncertain market conditions and the introduction of regulations such as the so-called Volcker Rule are expected to put pressure on top-line figures for Bank of America's sales & trading business.


Moreover, the European debt crisis has caused banks to write off portions of their sovereign debt portfolio in the most troubled eurozone economies. These write-offs are expected to continue in subsequent quarters, further hitting trading margins in the near-term.


Bank of America Sales and Trading Operating Margin

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40Comments
Dec 4, 2011 12:09AM
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Holy s**t, MSN has really exposed how much a sell side shill they really are.

 

Read Zero Hedge people.  Get the truth.

 

Just as good, research "Kyle Bass", and read/listen to his complete common sense, intelligent, and well researched analysis.

 

DON'T BELIEVE THE CRUD BEING PUMPED HERE.  Who owns msn?  Yep, Concast and GE, and they want stocks to go up endlessly because they have top paying "advertisers" who tell them what to say.  In fact, guess who was one of their top advertisers that now owes them over $900,000?...yep, MF Global...good luck getting that money you bought-and-paid-for media crooks.

Dec 4, 2011 10:37AM
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"The time has come for the foolish to fail."
 
So, who's more foolish the the bank that lent the money, or the fool who borrowed above his means, and defaulted on the loan.
 
Sound to me like there is blame on both sides of the equation.
Dec 4, 2011 2:36AM
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"

Give a man a gun and he can rob a bank, give a man a bank and he can rob the world.

Dec 3, 2011 11:46PM
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The time has come for the foolish to fail. No more bailouts, no more robo repossessions.
They need to go to jail along with the other criminals that caused this and profited from it and walked away. 
Dec 4, 2011 1:53PM
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Bank of A should be trading at $1.99, they're a bunch of THIEVES.!!!!!!!!!
Dec 4, 2011 12:18AM
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I wonder how anyone could arrive at a price for BOA? They are so opaque that it's impossible to tell where their financial standing is. Did these researchers discover some trickery at BOA that warrants that kind of prediction? Some kind of CDS variation that's never been seen before? The inside knowledge of an impending huge bailout for them?

 

In all my life, and that's a lot of years, I've never seen as much effort put into cheerleading for the obviously failed losers as I've seen in the last few months. I believe it is some offshoot of Roosevelt's "nothing to fear, but they don't want to seem that desperate so they get all these 'experts' to write articles alluding to the corner being turned.'

Dec 3, 2011 11:46PM
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So how much did BofA pay for this advertisement.  As if anyone would waste their $ in the stock market let alone their worthless stock.  Oh ya, all those ads about how wonderful and caring BofA is, well we were not born yesterday.  They have not changed one bit!!!!

Dec 4, 2011 10:02AM
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Best thing for the people, is for BoA to bite the dust...

How many times do you have to hear that they are Crooked Cheats..?

Other  banks and credit unions will fill their void...

 The world will not quit turning without them...

Dec 4, 2011 8:00AM
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the genius that bought countrywide should be the banker of the century???? wonder how much his pension is??????
Dec 4, 2011 10:26AM
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Everyone hate's B O A what has that got to do with the fact you can make money trading it people.
Dec 4, 2011 7:50AM
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How can anyone trust BOA? Moving $75 TRILLION (yes that is a T) in risky derivatives from its investment side to its FDIC Insured commercial side so the US Taxpayers can pay the losses when/if the European Banks implode. The Federal Reserve approved it leaving the FDIC in a state of shock, awe and outrage. The potential loss of $75 trillion insured by government money, dwarfs budget deficit "austerity" talks. Who wants to play with such a company that gambles with other people's money.

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Does anyone else see the twisted irony in this story?

 

"The preceding message was brought to you by the BOA Board of Directors. Buy stock in us, we're a good deal. Pay no mind to the fact that we bent you over and robbed you blind. Those silly little acquisition boo boos (Countrywide and ML) were just a little blip on our otherwise stellar management of company assets. Act fast, and we'll throw in a free toaster when you open an account!"

 

Thanks for the tip, but I think I'll pass. I'll continue to invest (not gamble) in businesses that actually deserve to be in business. The ones that treat their customersand shareholders like the are actually valued, not discounted.

Dec 4, 2011 3:47PM
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 Got my letter in mail today . Home equity loan cancelled. 20 years of on time payments 200 plus home payed off and they want to cancell a 2nd mort of only 19,000. not planning on ever using boa again this is not first time we have been thrown under the bus bye bank of amer. 
Dec 4, 2011 5:30AM
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So many need to borrow money but when it comes to paying it back all they can do is complain about the banks.  Fees are charged when idiots borrow and live beyond their means and they cannot meet the terms of their agreement with the bank.  I laugh @ all of the resentment against the banks.  B of A carried my home loan and I never once had a problem.  I paid my payment on time and did not dump my house and upgrade to a house I could not afford like so many others did before the bubble burst.  So many are still complaining about the bailout the money was paid back to the government already.  People need to move on and be more responsible with their own finances.  I hope B of A recovers from the mortgage mess and their stock soars to new heights.
Dec 4, 2011 11:22AM
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The  B of A bank has a culture of advancing at the expense of their customers. Other banks would provide much better service so if B of A flounders the world will be better off.
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The govrnment made banks buy out AIG and Merill Lynch then every since that time they have punished the banks for doing that. It was the govrnments fault that the banks made bad loans. They forced banks to make loans to people with little or no income to get loans. The only real requirement was to be breathing.

Dec 4, 2011 6:59PM
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no thanks, going to close after this month.
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Uh, hello...Bernanke and Paulson (former sec of Treas) are owned by Wallstreet and the TBTF conglomerate. I believe both (Paulson for sure) were reared by the wolves on Wallstreet. It's a revolving door dude. Wake up!
Dec 4, 2011 2:27AM
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I wouldn;t buy BOA if it was the last stock on earth!!  Bailout!! Bailout, Bailout!!! They took the money and ran!! come on!!
Dec 3, 2011 10:47PM
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BofA is going under, it´s likely to be nationalized and shareholders wiped out 
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