Bank of America Repays TARP; Who's Next?

As for Bank of America, it appears the firm is finally on the road to recovery and TARP repayment is positive for several reasons.

Its capital position is improved to handle future losses. The estimated dilution to Bank of America's future earnings as a result of the TARP repayment is offset by the absence of TARP dividend payments. Ramsden believes the firm trades at a 20% discount, making it a more attractive buy now that one uncertain element will be removed.

Importantly, once TARP is repaid, the government will have less of a direct role in Bank of America's operations, making it easier to hire talent with competitive salaries, including a replacement for departing CEO Ken Lewis.

"Repaying the TARP is a clear positive for Bank of America shares, as it removes the overhang caused by uncertainty surrounding government intervention," FBR analyst Paul Miller said in a note Thursday morning, upgrading Bank of America stock to overweight.

Morgan Stanley analyst Betsy Graseck, rates Bank of America a buy, calling it her top pick because of exposure to early-cycle improvements in the capital markets and economy. In her view, there are three factors necessary for a true bull run in BofA shares -- two of which were furthered by Wednesday's announcement.

"Catalysts are TARP Repayment, CEO announcement and declining consumer credit costs," says Graseck.

Lewis called a peak in overall credit losses during the third quarter, while Ric Struthers, head of Bank of America's credit-card division, recently said that his division's loss rates will likely top out in the fourth quarter.

When the results come out in January, investors may be looking at a new Bank of America: One about to break free of its TARP shackles, with a new leader, looking in the rear-view mirror at a financial crisis that created a larger, more diverse firm, even if its reputation isn't entirely unscathed.

-- Written by Lauren Tara LaCapra in New York

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