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Where's the Bottom for Bank of America Shares?

September 13, 2011 | About:

About the author:

John G. Alexander
John G. Alexander, CFA, is managing partner and portfolio manager for CastlePoint Investment Group where he achieved and sustained a record surpassing the S&P 500 eight of past nine years and 98% of all 36-month rolling, overlapping periods. John earned an M.B.A. degree from the Wharton School of the University of Pennsylvania and a B.S. degree from Indiana University. He co-authored "The Future of Value Investing" published by the Journal of Investing in 2000. Please visit the CastlePoint website (www.castlepoint-inv.com) for additional information.

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Rating: 3.4/5 (27 votes)

Comments

jonmonsea
Jonmonsea premium member - 2 years ago
You forgot the BAC chart for P/TBV. C appears 2x
jonmonsea
Jonmonsea premium member - 2 years ago
That said, it is fantastic to have articles of this quality on Gurufocus, and important to encourage more of the same
John G. Alexander
John G. Alexander - 2 years ago


adjusted

ranjitsudan
Ranjitsudan - 2 years ago
Good article. I think BAC exposure of 16B to PIGS should also be included in worst case scenario. That should reduce Tangible book value further.

There are other attributes in bank valuation which needs to adjusted in worst case such as level of reliance on short term funding, reduction in NIM due to higher funding cost etc.

BAC looks cheap not only from tangible book value basis but from earning power basis as well. Given they have 50% of their assets in low yield liquid assets; simply reallocating those assets to high yielding securities and loans should increase NIM and interest income dramatically.

John G. Alexander
John G. Alexander - 2 years ago


John G. Alexander
John G. Alexander - 2 years ago


[Note: Do not change the font of your comments or they will disappear; this happened to me twice. Thankfully, I saved a copy of my comments before posting this time.]

Jonmonsea, thank you for pointing out the missing BAC price-to-tangible equity chart (i.e., duplicate Citi charts). I've brought this to GuruFocus.com's attention and I hope the chart will be corrected shortly.

Most revelant pieces of information from the missing chart: The multiple reached a trough of 0.55x in February 2009, BAC presently trades at a 0.65x valuation and the high, low, average, and median price-to-tangible equity ratios, over the past decade are 4.38x, 0.55x, 2.96x, and 3.28, respectively.

Also, Bank of America shares traded at an average price-to-tangible equity multiple of 1.80x since the beginning of 2008 and 1.45x since January 2009. I point this out as it could be useful in establishing a base case intrinsic value estimate for BAC.

Note that these charts are for price-to-tangible equity, not adjusted tangible equity used in the above report. As a result, an apples-to-oranges issue is subtle, but present nonetheless, using the methodology above. However, I don't believe it undermines the analysis to any material extent. Most market participants, institutional and individuals alike, are either unaware of the FR Y-9C report or if they do, bother to read and analyze it (for BAC it was 56 pages in June).

Finally, I wanted to elaborate on a couple of the labels used in the Schedule HC-N table in the report. In the second and third rows of the table the labels end with "(less 75%)." When I hastily made formatting changes for submitting this report, I abbreviated the header too much (and screwed up the BAC price-to-tangible equity chart along with it).

As of June 30, 2011, the FR Y-9C showed $38.2 billion in loans on Bank of America's balance sheet that are 90 days or more past due and still accruing. Looking to line 11 of the Schedule HC-N, we find on line 11 $24.9 billion of this amount is "wholly or partially guaranteed by the U.S. government." Since the "guaranteed portion," found on line 11(a) of the schedule, is a meager $1.1 billion and "partially guaranteed" is ambiguous, I gave 75% credit for this amount. So we end up with $38.2B less 75% of $24.9B, which leads us to the $19.5B number found in the second row of the last column of the table.

As was well pointed out by Ranjitsudan, there are a number of other adjustments we could make to make the tangible book value equity number lower. However, my goal was to produce a worst case scenario that, in my opinion, had no more than a 10 to 15% probability of occurring.

superguru
Superguru - 2 years ago
Thanks, great article. I will consider BAC if it gets under $5.00 based on your $4.85 worst case. Probability is quite low but these once in century black swan events seem to happen quite regularly nowadays.
ranjitsudan
Ranjitsudan - 2 years ago
Thanks for mentioning federal reserve link. Its quite helpful - wondering why banks don't include these details in their qtr/annual statements to shareholders.

Other thing that we need to consider while estimating worst case scenario is share dilution. In above worst case scenario, if 19.2B worth of loans are written off, I am quite sure BAC will not meet Basel III requirement and has to raise capital by issuing common stock. We are looking at approx 3-4B additional shares.

ranjitsudan
Ranjitsudan - 2 years ago
John: I was reading FR 9-YC for BAC and comparing the numbers with financial statement released by BAC to shareholders for second qtr'11. YTD numbers for income and expenses are not reconciling. Do you know any particular reason of this? Underlying difference in net income is 600m but still interest income and non interest exp are way off.

Let me know if you find the same issue?

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