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Stop Buying Bank of America: Credit Suisse (Update 1)

Tickers in this article: BAC C JPM USB WFC

With the exception of Citigroup, which is going through its own cleanup process, the other names above have all been posting much stronger earnings than Bank of America, while trading much lower to earnings estimates. According to Thomson Reuters Bank Insight, Bank of America's return on average tangible common equity for the past four quarters through September was 3.50%, compared to 4.89% for Citigroup, 14.03% for JPMorgan Chase, 16.11% for Wells Fargo, and a very strong 21.60% for U.S. Bancorp.

Bank of America will report its fourth-quarter results on Jan. 17. The company announced on Monday that it expected its fourth-quarter earnings to be "modestly positive," as a result of its mortgage putback settlement with Fannie Mae (FNMA) and because of its participation in an $8.5 billion mortgage foreclosure settlement with federal regulators.

The company on Monday also announced that Fannie Mae, Freddie Mac and Ginnie Mae had agreed to allow the company to sell servicing rights on 2 million residential mortgage loans, with an unpaid balance of $306 billion.

Getting back to the 16% annual decline in expenses that Orenbuch says is currently priced into Bank of America's shares, the analyst said that "despite the announced mortgage servicing sales, it will take until 2014 for the annual run-rate of expense saves. Separately, we think it will be hard for Bank of America to grow revenues faster than the 'average' bank."

Orenbuch did say that "If BAC is able to get an additional 5 percentage point improvement in the efficiency ratio, this would correspond to $0.30 in EPS, and over 200 bps in return on tangible equity ," which would be "sufficient to have the shares be attractive at current levels."

"However, this represents about 40% of Legacy Assets & Servicing costs, which will likely take through 2015 to achieve that level of reduction," he said, making Bank of America a longer term expense savings play.

The efficiency ratio is, essentially, the number of pennies of expenses a bank incurs for each dollar of revenue. Bank of America's third-quarter efficiency ratio was 81.32%, according to Thomson Reuters Bank Insight.

Orenbuch estimates that Bank of America will earn $1.08 a share in 2013, with EPS increasing to $1.40 in 2014.


-- Written by Philip van Doorn in Jupiter, Fla.

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