Will Bank of America take the last chance to surprise?

Expectations on BAC’s earnings are in the low end although there has been some indications of relief for the hard-pressured bank. The large uncertainty of asset quality and mortgage-related litigation charges have pressed the valuation levels down to what might be considered to be junk. Price-to-Book (P/B) valuation for BAC is currently 0.29 for 2011E and 0.28 for 2012E. As we have touched upon before the risk of BAC capsizing altogether is plaguing investors, as other US banking peers to date have offered a better risk reward.

BAC stock is down 57% in the past year and the analyst community has over the course of the year become less optimistic as the share of buy recommendations has gone from 60% in January 2011 to the current 34%.

Lessons from the reporting season this far
The focus on core earnings and especially Investment banking and trading income, since they have been under enormous pressure following the slow activity on the transaction markets during 2011. Although BAC’s activities within this segment are massive, the key for BAC is to get the credit losses under control and impre asset quality, chart 1. And furthermore the market is looking for signs of BAC shifting gear and going on the offensive. Last week the company announced that a downsize plan is in place to abandon existing geographies if the credit crunch deepens further. The capital requirement is still limiting BAC’s ambitions.

Wells Fargo – Best in class
Wells Fargo (WFC), the largest home lender in the US, did live up to the expectations and continues to build on its great reputation as the firm backbone of the US financial system. EPS came in at 73 cents per share, along with estimates at 72 cents per share. More interesting being the increase in interest margin on mortgages as the WFC has been very aggressive in the mortgage origination market during 2011. It is interesting to compare the best in class versus the “worst” in terms of the revenue composition, charts 2 and 3.


It is obvious that WFC has a much larger focus on the traditional lending activities and at the same time has a great track record in managing the risks on the retail credit market. As WFC now is on the offensive that might indicate interesting opportunities in the US mortgage market during 2012, see previous theme.

US Housing market – defines the destiny of BAC?
It goes without saying that “as the housing market go, so goes the US economy”. The US concentrated banks performance, such as BAC and WFC, will be depending on the US housing market development in 2012. BAC provides a risky bet on a recovery during 2012 whereas WFC is the more stable player. We are currently still at extreme levels in the Housing starts, chart 4. Although the net change in the last months could be a signal that we have reached a bottom, chart 5. This will be much in focus for the months to come and watch for any comments from BAC tomorrow on this subject.