5 reasons to sell Bank of America now

Though its shares trade at a tremendous discount to book value, the company's ultimate mortgage risk is unknown, and there are better bargains out there.

By TheStreet Staff Oct 17, 2011 11:54AM

the streetBy Philip van Doorn, TheStreet

 

While it may seem like a bad time to sell Bank of America (BAC) shares, there are other similarly valued bank stocks to be found with a much less downside risk for investors.

 

Shares of the nation's largest bank holding company closed at $6.19 Friday, and while they gained 5% last week, the stock is down 53% year to date. After a second-quarter net loss to common shareholders of $9.1 billion, or 90 cents a share, Bank of America will announce its third-quarter results Tuesday, with analysts polled by FactSet expecting the company to post earnings of 28 cents a share.

 

Bank of America's shares on Friday traded for less than half the company's June 30 tangible book value of $12.65, according to SNL Financial. The shares were also historically cheap relative to forward earnings, trading for just 5.6 times the consensus 2012 earnings-per-share estimate of $1.12, according to analysts polled by FactSet.

 

In comparison, as of Friday's market close, shares of Citigroup (C) were trading for 0.6 times tangible book value and six times the consensus 2012 earnings estimate, according to SNL Financial. Of the remaining "big four" members, JPMorgan Chase (JPM) traded just below tangible book and for 6.1 times forward earnings, and Wells Fargo (JPM) traded for 1.5 times tangible book and 7.9 times the consensus forward earnings estimate.

 

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Digging just a little deeper shows that Bank of America is actually held in much lower regard than Citi, despite their similar valuations relative to book value. Bank of America's tangible common equity ratio was 5.87% as of June 30, while Citigroup's was a much higher 7.52%, which was the highest among the big four U.S. banks.

 

When comparing the increasingly important Tier 1 common equity ratios, which regulators are focusing on as the largest banks work on meeting the enhanced Basel III capital requirements, Bank of America ranked the lowest among the big four as of June 30, at 8.23%, while Citi was again highest, at 11.62%, according to SNL.

 

Here are five reasons to sell Bank of America now.

 

 5. It can't shoot straight. Bank of America will never live down its role as the "industry innovator" in planning to charge its checking account customers -- who provided $305.3 billion in interest-free funding, according to the company's June 30 Federal Reserve filing -- a $5 monthly fee for using their debit cards to make purchases.

 

Yes, Moynihan sort-of explained in a CNBC interview that most customers would "get out of this fee," which is directed toward customers "that don't have their total relationship with" the bank. But that didn't change the headlines.

 

The last thing Bank of America needs right now, when it is on the hook for such a huge portion of the mortgage mess, is to give protestors such an easy grievance to focus on.

 

4. Headline risk and a political target on the back. The company is a prime target for the Occupy Wall Street movement and for politicians. As the nation's largest mortgage lender and largest mortgage loan servicer, Bank of America is easy pickin' for anybody with a beef over the mortgage foreclosure mess.

 

Of course, despite all the well-documented sloppiness of the way the company and its competitors handled foreclosure filings, there haven't been substantial reports of borrowers who were current in their loan payments being forced out of their homes. But it doesn't matter -- the momentum is there, and it will continue to be painful for some time.

 

Senator Dick Durbin's (D-Ill.) comment on the Senate floor, in the wake of the debit-card fee uproar, that the bank's customers should "vote with your feet, get the heck out of that bank," shows the opportunistic bashing of the company is bound to continue in a very public way.

 

3. Unknown mortgage put-back risk. Most of Bank of America's trouble springs from former CEO Ken Lewis's disastrous purchase of Countrywide in July 2008. Shareholders breathed a sigh of relief after Bank of America in June announced an $8.5 billion settlement to “resolve nearly all” of the bank’s exposure to Countrywide-issued mortgage securities. But even after the ensuing $9.1 billion second-quarter net loss, the Countrywide-related bad news just kept on coming.

 

First came lawsuits filed by American International Group (AIG), Goldman Sachs (GS), a subsidiary of U.S. Bancorp (USB) and the Federal Deposit Insurance Corp. Then the Federal Housing Finance Agency -- which regulates Fannie Mae and Freddie Mac -- sued 17 banks over mortgage losses, demanding "full rescission and recovery" of damages from $57.5 billion in securities sales by Bank of America and subsidiaries Countrywide and Merrill Lynch.

 

Between the lawsuits and ongoing negotiations over the foreclosure mess, there's simply no way to estimate Bank of America's ultimate risk from the Countrywide disaster.

 

2. Possibility of additional dilution. Under the Basel III standards, Bank of America needs to achieve a Tier 1 common equity ratio of at least 9.5% by January 2019. Last month, Atlantic Equities analyst Richard State said that while the company was "technically correct" in estimating it would have a Tier 1 common ratio of 9.6% at the end of 2014, that wouldn't be sufficient, as the company "needs strong ratios to keep funding costs low and keep the confidence of counterparties."

 

Staite said that investors were looking for the company to come "closer to meeting full Basel III requirements by the end of 2012." Otherwise, according to the analyst, Bank of America would face rising funding costs and lower net interest margins, "making it less competitive."

 

So the prospect of a dilutive capital raise exists for investors, at least until there is a clearer estimate of the company's ultimate mortgage losses.

 

1. Citigroup offers a better ride for recovery. While its shares are similarly priced relative to book value, Citigroup faces far less overhang from the mortgage crisis as the company continues working through CEO Vikram Pandit's "good bank/bad bank" strategy to wind-down non-core assets.

 

With a much stronger capital base, Citigroup looks to be a smoother ride for long-term investors with confidence in economic recovery, and is also a diversified international play.

Even with Bank of America's shares tanking so much this year, selling the stock now and moving over to Citi could pay off handsomely.

14Comments
Oct 17, 2011 1:43PM
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If their telling you to sell then it must be a good time to buy
Oct 17, 2011 2:40PM
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Well, I have had my 'total' banking relationship with BOA for over 15 years. The fees would not apply to me due to the number of accounts and balances that I maintained with them. Nevertheless, Over the last 10 days I have systematically pulled by money out of BOA in favor of a regional credit union.  They take a tax payer bailout, provide a golden parachute to a failed CEO in excess of $5 million dollars, and they expect to recoup it from the lower third of the banking service sector?  

 

Let's follow the chronology here.   First they tell us to use debit cards to reduce their costs to process paper checks, and the convenience to us.  They sell this to the merchant - you'll get your transaction funds credited to your account overnight vice after the check clears.  Then they encourage us to not take monthly paper statements and returned checks -  all adding to their bottom line - then they stick the merchant with a 44 cent transaction fee.  Congress caps it at 22 cents - they transfer the liability from the merchant to us.   $60 a year in fees to the consumer is ~ 275 debit card transactions a year.  They got their 22 cents back.  

 

This past weekend I drove by "Bank of America Stadium' in Charlotte and passed the Bank of America Charlotte 500 NASCAR race.   Who paid for those sponsorship rights?  You did, 22 cents a slice, plenty of BOA senior VPS in attendance at all events and venues. 

 

  I'm ashamed to be a customer.  No more.

 

Buy all of this turkey you want.

Oct 17, 2011 2:26PM
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Bank of America sucks.  It gets bigger and bigger by taking over other companies, not by doing right by their customers.
Oct 17, 2011 3:40PM
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This article is utter nonsense !!!!!!!!
Oct 17, 2011 4:20PM
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B of A sucks. They have for decades. I used to work for them. They got their TRUST accounts so screwed up that they lost track of how much what customers had in their accounts, and were ordered to pay the customers what THEY (the customers) thought they had in their accounts, whether it was accurate or not!

 

They are so mismanaged, that when I QUIT then accidentally paid me twice what they should have in unused vacation pay!

Oct 17, 2011 3:40PM
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I closed all of my accounts with them two months ago.  I moved to Boeing Employees Credit Union.  In two months, I have made more in interest on my accounts than I made in the last 2 years at BOA.  I pay nothing in fees.  I can pay ANYONE that has an account with a routing number (not just the people on BOA's bill pay list) online.  I can get my utility bills delivered to the CU electronically and pay online for FREE.  I can use my Debit card for FREE.  I can speak to a teller at a branch for FREE.  I can use the ATM for FREE.

 

When I closed my accounts at BOA, they consolidated them and added in some interest (pennies) to the total and wrote me a cashiers check. They (deliberately) wrote the amount for .01 MORE than what was in my account.  The Bank Rep filled out the form, gave it to a teller who had to process the withdrawl request and create the check, and then give it to the manager to approve and sign.  My account overdrew that night and they took a $25.00 transfer to my overdraft line of credit and charged me $1.50 for that transfer.

 

17 years I was with the bank, so my accounts were all Gold.  And this is what they do to me on the way out.

 

And, with all of their financial troubles, the greedy fat repulicon supported PIGS paid out 4.4 BILLION dollars in BONUSES ALONE in 2010 to the top people.  So, they whine and bitch about losing 2 billion a year in lost Debit Card transaction fees, but can pay TWICE THAT AMOUNT in just BONUSES (not salary, wages, etc..) to their top PIGS.

 

And they wonder why people are leaving.  The 1% screwing the 99% all over again.

Oct 17, 2011 2:48PM
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"They're" not "their" dumba**,  i'm sure i'm going to take stock tips from you...lol...NOT.
Oct 17, 2011 3:34PM
Oct 17, 2011 8:34PM
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All I can speak for is BOA's mortgage area and there is no doubt on a scale of 1-10, they rate a 1. A doesn't know what B is doing and neither one seem to care. The truth hurts.
Oct 17, 2011 10:01PM
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Disappointed I had a bumrap experience with B of A when I agreed to finance a car I bought over a year ago. Soon after I got the loan I got calls from a latina with unintelligible messages like I owed them more than I got loan and the kept on calling for months I went to a bank bear my home and told a clerk about the annoying calls and she admitted it was B of A doing but she ask me they could delete my name off their list and it seems like they did. At that time I wanted to keep them monkeys off my phone and got really annoyed I refinanced my car from my credit union and was approved. What a terrible experience that was there were times that they almost gave me a heart attack. No more B of A for me. Whoa! why some people are so bad.Disappointed
Oct 17, 2011 11:43PM
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Once everyone flees from BofA they will need another helicopter drop of money from Bernake to keep this "Too Big to Fail" failure of a company from going bankrupt.  Until you hear the grumblings of that happening, don't even thing about buying this junk.  But be quick when you do, you've got to get in early before everyone else finds out they are getting bailed out again to make the money.
Oct 17, 2011 10:34PM
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I still get weird calls a toll free number 800-827-6655 any idea who the idiots are? I don't answer our home phone but the bother me for calling all the time without my permission. That sucks.Sad
Oct 18, 2011 5:47AM
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123 Refi recommends that since there's a higher volume of refinance applicants now, it's best to be prepared and gather all the financial docs you need before you seek a quote so you can get your application processed before lenders raise rates.



Oct 17, 2011 9:21PM
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Too late.  I sold it around $40.  It's nice to actually make the right call once in awhile.  I still don't want to buy it because I'm a dividend investor.  If they can't pay a decent dividend, that tells me that are still in deep doo-doo, whether they admit it or not. 
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