Shares of Bank of America (BAC) have risen impressively, and implausibly, off of their lows at the height of the financial crisis.
Many analysts cite new CEO Brian Moynihan as a key reason for the stock’s performance. Moynihan has come in and made giving the bank a voice in new regulation a top priority.
In an effort to change his company’s beleaguered reputation, Moynihan spent five of his first 13 days as CEO in Washington D.C.
When Moynihan was told that loan modifications were a priority for the Obama administration, he made sure Bank of America would be the first loan servicer to join a new program that modifies payments on second mortgages.
He’s also attempting to influence policy.
• Moynihan has suggested that the U.S. offer loan guarantees to homeowners willing to hire small businesses for energy-efficient, home-improvement projects.
•He has hinted that Bank of America would not oppose a proposed consumer-protection agency.
• Although remaining neutral, he has voiced concern about how President Obama would define the proprietary trading he wants to curb at giant banks.
• And, during a television interview on February 28, Moynihan said he will vote for U.S. Representative Barney Frank, a key proponent of financial industry reform, in the upcoming November election.
Whatever he’s doing, or isn’t doing, it seems to be working. Shares of Bank of America are up nearly 6% this year – outperforming key rivals J.P. Morgan Chase (JPM) and Goldman Sachs (GS).
Bank of America was considered one of the biggest pariahs in the banking industry during the financial sector meltdown. And when they received $45 billion in taxpayer funds, former CEO Kenneth D. Lewis drew the ire of shareholders and Congress alike.
“BofA needed a leader that would be the least disruptive. Moynihan may not be the most charismatic CEO. He wouldn’t be able to fill Jamie Dimon’s shoes but he can fill Ken Lewis’ shoes,” said Anthony Polini, an analyst with RBC Capital Markets, referring to the CEO of J.P. Morgan Chase.
And if Moynihan turns out to be BofA’s equivalent of Hewlett-Packard’s Mark Hurd, a guy who lacks sizzle but delivers results, few shareholders will complain about Moynihan not being as media savvy as Dimon.
“The air is starting to clear, and people are looking at Bank of America again as an investment with upside as opposed to being a company burdened with political risks and suffering from a tarnished reputation,” said Polini.
To be fair, there have been other reasons for investors to feel optimistic since Moynihan took the helm:
• Credit card charge-offs and delinquency rates fell in January from December. That could be a sign that the worst is over for the bank in terms of future loan losses tied to consumers.
• In addition, a federal judge earlier this week approved, albeit begrudgingly, the company’s $150 million settlement with the SEC over Merrill Lynch bonus disclosures. That means BofA will avoid a lengthy and potentially nasty court battle.
Still investors will eventually have to reconcile an annual net charge-off rate of 13.25% in January. Particularly since Bank of America has more exposure to the strained consumer than either Citigroup or J.P. Morgan Chase.
Plus, 0:00 /2:53More credit-card fees loom
with the unemployment rate remaining high and the housing market still sluggish, BofA, which bolstered its mortgage business with the purchase of foundering home lender Countrywide in 2008, may have more near-term credit risks than its rivals.
Bank of America also is set to increase its total number of shares outstanding by 1.3 billion, a move that the bank found necessary to help fund the repayment of its $45 billion in bailout funds to the government.
Shareholders approved the decision Tuesday, apparently feeling that it was best to do whatever it took to get out from under the increasingly onerous restrictions placed on companies that received money from the Troubled Asset Relief Program.
However, issuing that many new shares will dilute the value of the existing stock.
Still, Bank of America was so hated during the depths of the financial crisis that it may still have room to run before its stock looks overvalued again. BofA trades at a discount to many of its competitors on a price-to-book value basis, one of the key measures looked at by bank analysts.
One money manager cautioned that despite its attractive valuation, BofA still isn’t out of the woods yet.
Don Hodges, co-portfolio manager with Hodges Capital Management in Dallas, said his firm sold its stake in BofA and other banks in 2008. And even though he runs a contrarian-oriented fund that bets on stocks Wall Street loves to hate, he’s still not tempted to buy BofA again.
“We’re on the sidelines until we know how much (in) bad loans they really have. Banks are reluctant to recognize bad loans,” Hodges said.
But Polini thinks the stock could double in two years. That’s obviously a bold call but he said that Moynihan is exactly what BofA needs right now — a company veteran who will focus on controlling costs. That may seem boring to some, but Polini thinks BofA was better off not trying to find a celebrity CEO.
