BofA Bailout Exit Is Key to Bank Valuations

CHARLOTTE, N.C. (TheStreet) -- The way investors value certain bank stocks may hinge on regulators' decision to allow Bank of America(BAC Quote) to begin paying back bailout funds.

Because bank earnings have proven volatile and dependent on an array of factors apart from their actual ability to earn money from core banking operations -- from accounting shifts to hedging gains -- investors haven't been able to rely on traditional metrics such as price-to-earnings ratios to value their stocks. The wide range of analyst estimates for future earnings, and their lack of success in predicting trends so far, is evidence of the disparity between expectations and real results.

Instead, investors have relied on a variety of metrics, many based on capital levels, to determine a bank's worth throughout the crisis: Liquidation value, Tier 1 ratios, tangible common equity levels, pretax, pre-provision earnings, and so on. Regulators' decision on BofA will standardize some of those metrics once again, at least for banks that are still under the auspices of the Troubled Asset Relief Program. The same thing happened in May when the Federal Reserve released stress test results, separating banks into the "haves" that could repay bailout funds, like JPMorgan Chase (JPM Quote) and Goldman Sachs(GS Quote), and the "have-not-yets," like BofA and Wells Fargo(WFC Quote).

Bank of America has said repeatedly that it is ready, willing and able to repay TARP, and is just awaiting word from regulators on when that can start taking place. It plans to do so in installments, first paying off the extra money it received to close the Merrill Lynch deal, in order to separate it from more troubled firms like Citigroup(C Quote), American International Group(AIG Quote), Fannie Mae(FNM Quote), Freddie Mac (FRE Quote) and automakers that received above-average government support.