Go back to 2008's financial crisis and Bank of America, weakened by the acquisition of Merrill Lynch, looked troubled - by spring 2009, it had taken $45bn (£28bn) of US government support. But, unlike UK banks that needed bailout cash, Bank of America had recovered sufficiently by the end of 2009 to repay US taxpayers. And progress has continued since then, leaving the shares, which still trade well below reported net tangible assets, with plenty of recovery potential.
- Profits set to surge
- US economy still growing
- Comfortably capitalised
- Small exposure to eurozone
- Slender dividend yield
- Mortgage-backed bond claims rising
First-half results for 2012 certainly contained evidence of recovery. Bank of America turned a hefty $10.1bn pre-tax loss in the previous first half into a $3.9bn pre-tax profit, helped by a big improvement in credit quality. Provisions for credit losses fell 41 per cent year on year to $4.19bn and non-performing loans as a proportion of all loans fell to 2.87 per cent from 3.22 per cent a year earlier.
Further progress is anticipated. Investment bank JPMorgan expects underlying pre-tax profit to rise from $639m in 2011 to $11.1bn and to then soar to $21.1bn in 2013. Even a $32bn slide in the size of the average loan book during the year to end-June to $907bn isn't so grim. Management is refocusing on core operations and over $50bn-worth of non-core assets have been offloaded since Brian Moynihan became the chief executive in 2010. He's also hacking at costs and expects $3bn of savings by mid-2015.
The US economy may help, too. True, with 8.1 per cent of its workforce unemployed, it is hardly booming, but at least it's growing - and that's good news for credit demand and credit quality. In contrast to the recession-hit UK and eurozone economies, the US economy grew 1.7 per cent in the second quarter and the IMF expects 2.25 per cent growth in 2013. Admittedly, a combination of rising taxes and spending cuts due at the year-end - the so-called fiscal cliff - could undermine that. But policy makers may rethink those measures, while another dose of quantitative easing in the US, which may have been announced by the time you read this, would boost confidence.
BANK OF AMERICA (BAC) | ||||
|---|---|---|---|---|
| ORD PRICE: | $8.58 | MARKET VALUE: | $92.5bn | |
| TOUCH: | $8.55-$8.58 | 12-MONTH HIGH/LOW: | $10.10 | $4.92 |
| DIVIDEND YIELD: | 0.5% | PE RATIO: | 16 | |
| NET ASSET VALUE: | $21.7 | |||
| Year to 31 Dec | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|
| 2008 | 4.43 | 54 | 224 |
| 2009 | 4.36 | -29 | 4.0 |
| 2010 | -1.32 | -37 | 4.0 |
| 2011 | -0.23 | 1 | 4.0 |
| 2012* | 11.1 | 53 | 4.0 |
| % change | – | – | nil |
*JPMorgan estimates Matched bargain trading Beta: 1.8 £1=$1.58 | |||
Bank of America is also insulated from the eurozone. Its exposure to Greece, Italy, Ireland, Portugal and Spain stands at just $9.6bn; by contrast, Barclays, for example, has £72.4bn at risk in those five nations. The bank is also increasingly well capitalised. Its ratio of tier-one common capital (basically equity) to assets, weighted for risk, rose 11.2 per cent from 8.2 per cent a year earlier. That leaves it among the best capitalised in the US - Wells Fargo's ratio stands at 10.1 per cent while JPMorgan's is 10.3 per cent
But building that capital cushion has meant weak payouts for shareholders. No share buybacks are planned and the dividend is nominal. Management's efforts to grow the payout ended in failure in 2011's second half after regulators at the Federal Reserve Bank blocked the move - they prefer banks to retain capital. That said, shares in US banks aren't known for their generous dividends; even the fattest yield in the banking sector, on JPMorgan's shares, is only about 3 per cent.
There's also the problem of pressure from the institutions that bought mortgage-backed bonds issued by US banks - they reckon they were mis-sold them. It's a problem for most US banks and Bank of America saw its buyback claims rise by over $6bn in the second quarter to $22.7bn. However, management reckons that most new claims relate to bonds, where the underlying borrowers made at least two years of payments before defaulting, indicating that the bank may not be at fault. Besides, past settlements have typically been between 6¢ and12¢ in the dollar, suggesting a manageable overall exposure.
