Can This Bank Win Back America?
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bank of America (NYSE: BAC) is perhaps one of the most interesting stories facing investors today. While on the one hand there are a slew of people who believe the bank is full of rotten scoundrels that are only interested in ripping people off, many others say much of the thievery that led up to the global recession was driven largely driven by the company's subsidiary Countrywide Financial. Of course, BofA was at the helm and should be held responsible for the travesty that left many Americans in debt, and which largely contributed to the global financial crisis. Indeed, the bank should be hated by Americans, and the rest of the world for that matter.
But, on the other hand, the bank has been forced to clean up its act. It is currently facing an $8.5 billion lawsuit, which, once settled, will allow the bank to move its focus back to growth. Furthermore, BofA didn't dispute claims from 400,000 Countrywide customers and agreed to pay them $8.4 billion. That shows the firm has paid, and is paying, for its mistakes. But while many people will likely lambaste me for saying this, those who lost money because of their bad mortgages are partially to blame. After all, they were not forced into signing those contracts, and they should have known the risks associated with sub-prime mortgages. To me, Bank of America is extremely undervalued because of the widely accepted belief that the bank is evil. This sentiment will eventually blow over and investors will begin to trust the bank again, substantially increasing the bank's share price. That's why I'm a shareholder.
The company had set aside by early 2013 a massive $19 billion to pay for potential warranty and representations claims. That means the firm's profitability won't feel the pinch when it makes further settlements, and this should make shareholders feel secure. Furthermore, the amount set aside could very well be more than the company needs, and that could give the firm billions of cash remaining after the disputes are settled.
If BofA regains investor confidence...
Once the muck of the recession completely blows off of Bank of America, many financials investors will likely pull their money out of firms such as JP Morgan Chase (NYSE: JPM) and Citigroup (NYSE: C) to invest in BofA, as I see those two firms as already at fair value.
JP Morgan has managed to realize reasonable profits, even though faith in the American banking sector has been low. The company is certainly under strict scrutiny from regulators, and this has those working for the firm on their best behavior. With the company already priced well above its pre-recession high, it appears the firm is already fully valued, and could experience a sell-off if investors move back to Bank of America. The firm is priced at nearly $55, and Morningstar sees this as about $2 over fair value.
Citigroup has a brighter prospects than JP Morgan, but could still lose out if confidence in BofA increases. The company is well-leveraged in emerging markets throughout Asia and Latin America, and this could put the firm at an advantage over its counterparts if loan demand is weak in the U.S. However, with much of its attention on China, there could be further trouble if that economy doesn't pick up the pace. But it should be noted that if Citigroup is able to meet its target of cutting costs by $900 million this year and another $1.1 billion next year, then the firm could be the place to keep its profits high.
Boiling it down
Investing in a financial institution such as Bank of America seems like a risky venture, but with much of the repercussions of the recession behind the company, there is a solid chance that the firm will experience nothing but gains. The share price hasn't reflected the overall economic recovery due to the hard feelings that many investors still have. But I consider the foundation of any good investment to be leaving emotions aside.
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Phillip Woolgar owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!