Which Stock is Up 63% Year-to-Date, But Suffers From Mounting Mortgage Mess?
Bank of America’s (BAC) 60% share price gain in less than 10 months gives the illusion that hoards of investors expect happy days soon for this long-suffering institution. But illusions by definition distort reality. What we’re really seeing with Bank of America are shares swinging wildly in sub-$10 territory, in a company that may or may not be forced to spend the money recovery players expect to get. So don't get too excited by the stock chart.
Despite appearances, there is no optimistic horde here. We can see that enough investors believe in BofA to pay at least 7 bucks a share for a piece of it, but few of those actual buyers are major investors. A slew of big hedge funds sold BofA shares in the second and third quarters of 2012, including financials investor Donald Yacktman. Hold and underweight recommendations on the shares outnumber buys and overweights by about two to one. YCharts Pro rates the bank’s fundamentals and share price valuations as average.
Really, the wide berth that a lot of investors are giving BofA now can be seen in its share price to tangible book value ratio compared to other banks. Unlike most of its competitors -- the likes of JP Morgan (JPM), Citigroup (C), USB (USB) and Wells Fargo (WFC) -- BofA trades at a significant discount to its tangible book value. BoA had a much more reassuring ratio two years ago.
The valuations have dropped as the fallout from the subprime mortgage crises lingered. Demands for BofA to buy back troubled mortgages that it (or Countrywide, its acquired albatross) sold to other institutions actually rose some 150% last year from 2010 to $25 billion. It got another $5 billion in similar demands just last quarter, some four years after the problems first arose. The consumer real estate division lost $877 million in the third quarter because it’s still spending lots of money managing delinquent and defaulted mortgages. Last month, the bank agreed to pay $2.4 billion to investors who felt duped in its 2009 takeover of Merrill Lynch & Co.
The bank calls these kinds of problems “legacy issues,” and they continue to eat away the evidence of the bank’s improving operations. BofA’s earnings would have been a whole lot better than this without them.
Those consumer real estate losses, for examples, were due solely to problems in the old business. BofA’s home mortgage and home equity loans are up 18% in the third quarter from a year earlier, prompting CEO Brian Moynihan say it looked like the housing market had turned a corner. If that’s true, it should help BofA pull in some much needed revenue.
Deposits, investment banking and small business lending also is on the rise. And capital levels look strong enough now to reignite hope that the company will get regulatory permission to boost this crippled dividend next year.
So BofA’s core businesses may very well be on the cusp of a pleasant recovery. The question then becomes: where will the money from that improvement go? Because right now, there’s a big pit full of weird old mortgages, lawsuits and repurchase claims just waiting to suck it up.
Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.