Bank of America: Never-ending QE winner
Financial stocks led the market rally after the Fed announced a major expansion to its bond-buying program.
By Philip van Doorn
Bank of America (BAC) was the winner among the largest U.S. financial names on Thursday, with shares rising 5% to close at $9.40.
The Federal Reserve Open Market Committee announced that the central bank would purchase "additional agency mortgage-backed securities at a pace of $40 billion per month," while continuing its current securities buying program until the end of the year, "to extend the average maturity of its holdings of securities as announced in June." The Fed will also continue to maintain "its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities."
The Fed said that it would purchase total mortgage-backed securities at a pace of roughly $85 billion per month. As expected by many economists, the Open Market Committee said that "exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." The target federal funds rate is currently at a range 0 to 0.25%.
The KBW Bank Index (BKX) rose 3% with all 24 index components showing gains for the session.
Bank of America's shares have now returned 70% year-to-date, following a 58% decline during 2011. To put those numbers in perspective, the one-year total return for the shares has been 35%, while the two-year return has been a negative 32%, and the stock is down 79% for five years.
The shares trade for 0.7 times their reported June 30 tangible book value of $13.22, and for ten times the consensus 2013 earnings per share (EPS) estimate of 91 cents, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 55 cents.
With so much at stake as the company works through mortgage repurchase claims, mainly springing from its disastrous purchase of Countrywide Financial in 2008, it is no surprise to see Bank of America bounce highest after the Federal Reserve's major stimulus announcement. The company's mortgage putback claims increased by 41% during the second quarter, to $22.7 billion as of June 30.
Goldman Sachs analyst Richard Ramsden on Monday reiterated his neutral rating on Bank of America, saying the company's shares were "fairly valued, given risks," and the company's timeline for implementing its Project New BAC efficiency program and reducing "its legacy asset servicing costs," as it continues working through the mortgage mess.
Ramsden said that for Bank of America, "earning its cost of capital is likely a 2015+ event and would be highly dependent on circumstances largely outside BAC's control, like the housing recovery and revenue loss associated with expense cuts," and estimated "that with a 5% decline in revenue, better expense efficiency over time could command $12 per share versus closer to $8 per share today, but not without risks."
The analyst called Bank of America's potential upside "enticing," but said his firm recommended staying on the sidelines for the time being, as the potential revenue reduction from the cost cuts " is difficult to quantify," and because "recognizing the proposed cost savings will take time and carry execution risk."
Bank of America CFO Bruce Thompson on Monday said that after adjusting for goodwill impairments and first-quarter annual compensation expenses, "our expenses were down about $3 billion in the second quarter from the prior-year period and down about over $1 billion on a quarter-over-quarter basis."
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