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Bank of America is Flush With Capital: Analyst

Tickers in this article: BAC C JPM

NEW YORK ( TheStreet) -- Bank of America (BAC) looks like a solid growth and income play, according to Atlantic Equities analyst Richard Staite.

Staite rates Bank of America "Overweight," with a $12 price target and on Wednesday said in a report that "BAC already met its Basel III capital requirements in Q3 thus putting it in a strong position to return capital to shareholders." The analyst called the company "our top pick among U.S. banks."

Bank of America is currently paying a nominal quarterly dividend of a penny a share, and did not seek Federal Reserve approval to buy back shares when the regulatory conducted its last round of annual stress tests. Staite estimates that after the 2013 stress tests in March, the company will be approved to pay out $2.086 billion in dividends in 2013, with the dividend yield jumping to 1.8%.

While a dividend yield of 1.8% is not particularly impressive, considering that JPMorgan Chase (JPM) is already paying out 30 cents a quarter, translating to a dividend yield of 2.81%, based on Wednesday's closing price of $42.77, it's quite a significant jump for Bank of America. And state expects the company's annual dividends to jump to $3.864 billion in 2014, for a dividend yield of 3.4%, matching his yield estimate for JPMorgan Chase for that year.

Bank of America certainly has its challenges, mainly springing from its purchase of Countrywide Financial in 2008, with $25.5 billion in unresolved mortgage claims as of Sept. 30. The company also has a long-running dispute with Fannie Mae (FNMA) over putback claims, that has for the most part kept BAC from selling newly originated mortgage loans to the government-sponsored giant.

The company's earnings have been weak, with operating returns ranging from 0.06% to 1.08% over the past five quarters, according to Thomson Reuters Bank Insight, but as the company's capital has solidified, the shares have recovered quite a bit of what they lost during 2011.

According to Staite, Bank of America "now has a 9.0% Basel III ratio meaning that it has effectively met it full Basel III requirements. In comparison JPM currently has a $27bn deficit and Citigroup (C) a $18bn deficit on our calculations, assuming BAC must reach 9.0% but JPM and Citi must reach 10%" including the higher capital conservation buffers required by the Federal Reserve for those companies.

Staite estimates that by the end of 2014, "JPM will eliminate its deficit but by this stage BAC will have amassed $29bn in surplus equity."

The analyst expects Bank of America to be approved to repurchase $4 billion worth of common shares during 2013, with buybacks increasing to $10 billion in 2014, which will "shrink BAC's shares outstanding by around 10% which provides part of the explanation for why our 2014 EPS estimates are 25% above consensus." The consensus among analysts polled by Thomson Reuters is for Bank of America to earn 97 cents a share in 2013, with EPS increasing by 29% in 2014 to $1.25.