We have upgraded our long-term recommendation on Bank of America Corporation (BAC) to “Neutral” from “Underperform”. The rating change reflects management’s decision to sell its non-core assets to further strengthen its balance sheet and bolster its capital base.
BofA had been trying to remove its non-core assets from its balance sheet for quite some time. On July 8, the company announced a deal to sell its Balboa Life Insurance Co. and Balboa Life Insurance Co. of New York to Securian Financial Group Inc. Additionally, in June, BofA had announced the completion of the sale its Balboa insurance unit to Australia’s QBE Insurance Group Ltd. Also, in 2010, the company had undertaken a number of actions to shed its non-essential businesses.
Furthermore, BofA recently launched an efficiency program to enhance its earnings by lowering its overall expenses. The company anticipates better results on expense levels to benefit the financial performance by the second half of 2012.
Also, a fall in credit costs over the last few quarters is a major positive for BofA, with credit quality improving faster-than-expected. Moreover, we believe that credit quality would get better over the next several quarters as economic conditions continue to improve.
Additionally, taking advantage of its large scale and across-the-nation reach, BofA continues to add new products to its retail channel. The company also continues to post strong results at its investment banking arm. We anticipate this trend to continue and lead to a significant betterment in the company’s financials as it leverages its retail franchise and strong debt underwriting capabilities.
On the flip-side, BofA’s recent decision to settle its legacy Countrywide mortgage repurchase and servicing claims with a cash payment of $8.5 billion will greatly impact the company’s financials in the second quarter of 2011. Further, the company would provide an additional $5.5 billion in the second quarter for representations and warranties liability for both Government-Sponsored Enterprises (GSE) and non-GSE exposures. Besides, BofA also expects other mortgage-related charges of $6.4 billion in the second quarter. Considering these expenses, BofA is expected to report a net loss of $8.6–$9.1 billion for the second quarter.
Furthermore, in March 2011, BofA’s plan to hike dividend was rejected by the Federal Reserve. The Fed has asked the company to resubmit its capital plan and show more financial strength to combat another economic slump. Hence, until the company accomplishes a stable financial state, regulators will continue with their cautious approach.
Also, BofA’s operating expenses continued to rise over the last three quarters. As the company is in a process of addressing its legacy issues and continues to invest in business expansion, operating costs are likely to remain high.
Currently, BofA retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, JPMorgan Chase & Co. (JPM), one of the company’s closest peers, retains a Zacks # 3 Rank (short-term ‘Hold’ rating).
BANK OF AMER CP (BAC): Free Stock Analysis Report
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