Analyst sees BofA gaining on housing recovery
The bank's stock could rise 40% as problem loans and foreclosure losses decline.
The strong recovery in housing prices could significantly boost earnings and capital at Bank of America (BAC) over the next two years, according to Atlantic Equities analyst Richard Staite.
All banks stand to gain from rising home prices as it will likely lead them to "release" mortgage loss reserves as borrowers' financial health improves.
But a more relevant metric at this stage of the recovery for banks would be pre-provision net revenue, which nets out one-time items and provision for loan losses.
Bank of America is likely to see a big improvement on this measure as the recovery in home prices will accelerate the decline in servicing costs, which currently run at $10 billion a year at the bank. "Higher prices and housing market activity help reduce foreclosure related losses and speed up the reduction in the number of problem loans," Staite noted in his report.
Improvements in pre-provision net revenue (PPNR) is also a major factor in the Federal Reserve's stress test. Higher PPNR could therefore improve the Bank of America's capital ratios and drive capital returns as well.
Bank of America got Fed approval for a $5 billion buyback in 2013, but the analyst sees this jumping to $10 billion in 2014 and $12 billion in 2015.
Higher earnings and buybacks could lead to a near doubling in earnings per share according to Staite. The analyst expects EPS to climb from $1.05 in 2013 to $2 by 2016.
Staite has a 12-month price target of $14.70 on the stock, which equals Bank of America's tangible book value. However, as Bank of America gets closer to "normalized earnings," Staite expects valuations to improve to 1.1 times tangible book by end 2014, implying a share price of $17.20 , which is a 40% upside from current levels.
Shares of Bank of America are up over 5% this year. The stock closed at $12.28 on Tuesday.
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