Why Bank of America is Attractive Again

By Farah Lalani - February 13, 2012 | Tickers: BAC, C, JPM, WFC | 0 Comments

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Stocks rose on Monday, led by bank shares after Greece's parliament voted for drastic spending cuts to pay for a 130 billion euro ($170 billion) bailout by the European Union and International Monetary Fund.

So far this year, bank shares continue to outperform after posting deep losses in 2011. Leading the gains is Bank of America (NYSE: BAC), which closed up 2.2 percent at $8.25 on Monday and is up more than 45 percent this year. Bank of America entered 2012 with a stronger balance sheet. The company's capital ratios and credit quality improved in the final quarter of 2011 making it attractive to buyers.

From the beginning of this month, Bank of America shares have soared 12.36 percent as of Monday’s close.

In comparison to its peers, Bank of America has the largest potential for capital gain because the stock has been significantly hit due to its share in the mortgage business. For the year, Bank of America is up 45 percent, best of the 30 stocks that make up the Dow Jones Industrial Average. Big banks collectively are up 15 percent.

The $26 billion mortgage settlement from last week also aided to some of the positivity around Bank of America, even though it will provide the largest portion of relief at $11.8 billion. Its peers — Wells Fargo (NYSE: WFC), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C) — will provide $5.4 billion, $5.3 billion, and $2.2 billion, respectively.

Bank of America’s $11.8 billion commitment includes the following:

• Approximately $7.6 billion in borrower assistance, including targeted principal reduction.
• Approximately $1.0 billion in refinancing assistance to customers in the participating states.
• Approximately $2.25 billion in direct payments to state and federal governments and in borrower restitution, of which $1.9 billion would be an upfront cash payment and the remaining $350 million would be paid only if Bank of America failed to meet certain principal reduction thresholds over a three-year period.
• Up to $1.0 billion in payments to settle FHA claims, of which $500 million would be an upfront cash payment, and the remaining $500 million would be paid only if Bank of America fails to meet certain principal forgiveness levels over a three-year period.

The financial impact of the settlements is not expected to cause any additional reserves to be taken over those made during 2011, based on the company’s understanding of the terms. Since banks had already started allocating reserves for the expected costs prior to the agreement, investors welcome the settlement as positive news as it removes some uncertainty hanging over the financial industry.

Adding to the optimism, the financial sector got another sign of improvement this month. Reports released earlier this month showed that the economy added 243,000 jobs in January and the unemployment rate fell to a three-year low of 8.3 percent.

Bank stocks highly depend on the housing market, the domestic economy, and the international landscape. Taking into account the housing settlement, the positive employment report, and Greece's debt deal, optimistic news has sprung up from all three of these areas, making Bank of America less risky and more attractive.

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