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Why Bank of America Is Set to Grow

May 16, 2014 | About:

Bank of America (NYSE:BAC), inclusive of yesterday's poor trading, has still provided investors a 37.9% return in the last 12 months, and has recently upped its dividend after passing its Federal Stress Test in the last month.

Throughout 2014, the bank has continued to make progress in this regard. It's been settling litigation left and right, and CEO Brian Moynihan appears to continue steering the ship in the right direction. USA Today reported on recent litigation leading up to the bank's earnings:

Bank of America in March agreed to pay $9.3 billion to settle claims it marketed risky mortgages to Fannie Mae and Freddie Mac. At the same time, the bank reached a $15 million settlement with the New York State Attorney General's office over its 2009 purchase of Merrill Lynch.

And on April 9, the bank also agreed to pay $772 million in refunds and fines to settle allegations by the Consumer Financial Protection Bureau and the Office of Comptroller of the Currency that it had bilked millions of customers with deceptive credit card practices. The agreement was "in line with what we expected," bank spokesman Tony Allen said last week.

Although many people seemed to be surprised by Bank of America's earnings, there were some of us that were expecting exactly what we got: good underlying bank performance that was negatively affected by one time legal costs.

When the smoke cleared, the bank had beat on its revenue line, posting a number of $22.76 billion versus analyst estimates of $22.33 billion to $22.4 billion. Ex-items, the bank wound up earning $0.35 per share.

In addition to its legal costs, the bank saw its mortgage business — which it has been trimming over the last couple of years — slowing. Mortgage originations were down 65%.

The bank's balance sheet strength continued to improve. It had $1.4 billion in charge offs, down from $2.5 billion in the same quarter the year prior.

Some of the more important news came later on in the afternoon when it reported the bank was close to settling with the DOJ, a reason which I think is one of the reasons it bolstered its legal reserves in quarter one:

  • Bank of America (-2.5%) boosted legal reserves by $2.4 billion in the first quarter, and management is playing coy about why, but the WSJ says the bank is near a multi-billion dollar settlement with the DOJ to end civil probes into a number of legacy issues. The talks have been ongoing for months, but intensified, say sources, after JPMorgan late last year settled for $13 billion.

If settled, it'll surely cost the bank a significant amount of money. But, it'll be over, and that's the important part. Putting their heads down and knocking each one of these out of the way until there's none left. It may not look like it, but the bank is making significant progress in this regard.

The bank continues to get leaner and meaner under the watchful eye of Moynihan. The bank's total employees was down to 238,600 from 262,800 in the same quarter a year prior. It's also operating with 5% fewer branch locations. This is all part of a cost-cutting initiative that was put into place a couple of years ago, that is concluding during this year.

Bank of America's banking division posted a profit of $1.66 billion, as compared to $1.45 billion a year earlier. This shows underlying fundamental progress for the bank's "meat and potatoes" business.

As the bank continues to stay on the front line of the automation adoption curve in the banking sector, and continues to keep its head down and make progress, I think better days will be ahead for shareholders.

Moynihan seems to be doing a damn good job in making progress to get the bank over the hump of the '07 to '08 disaster, which was the main item he was tasked with as CEO of the bank.

I contend that BAC is a buy here. There's likely to be a couple more months of legalese headlines that could potentially mire the stock price, but in the long term, the bank's underlying business is performing. Better days are ahead for Bank of America; it just needs to hold on and wait. Moynihan has been doing a brilliant job since he began, and my trust is with him and Buffett that Bank of America will soon rise like a phoenix from the ashes.

Rating: 5.0/5 (1 vote)



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