Bank of America: Economics Winner

NEW YORK (TheStreet) -- Bank of America (BAC) was the winner among the largest U.S. financial names on Thursday, with shares rising 5% to close at $8.32.

The broad indexes all rose 2%, after European Central Bank president Mario Draghi said that the ECB was ready to buy unlimited quantities of short-dated Spanish and Italian bonds in the secondary market if either Rome or Madrid requested a full International Monetary Fund-style reform program.

There was also good economic news at home, heading into Friday's unemployment report for July. ADP reported that nonfarm private employers added 201,000 full-time employees during August, increasing from an upwardly revised 173,000 in July.

The KBW Bank Index (I:BKX) rose 3% to close at 48.51, with all 24 index components showing gains.

Bank of America's shares have now returned 50% year-to-date, following a 58% decline during 2011.

The shares are still cheap relative to most large U.S. banks, trading for 0.6 times their reported June 30 tangible book value of $13.22, and for nine times the consensus 2012 EPS estimate of 91 cents. The consensus 2012 EPS estimate is 55 cents.

JPMorgan analyst Vivek Juneja on Friday said that Bank of America and SunTrust (STI) should see a "sizeable earnings benefit" from rising home prices, since the companies have continued to see elevated expenses from nonperforming loans and repossessed real estate "at the high end at 138% and 95% of 2Q12 EPS, respectively," and that a "5-20% further reduction in residential mortgage related [loan losses] and [repossessed real estate] expenses above expectations could add 3-7% to 2013 EPS for Bank of America and SunTrust."

Juneja reiterated his "Overweight" rating for Bank of America, with a price target of $11.50, while upgrading SunTrust to "Overweight" from "Equal Weight," saying that a "0% reduction in other credit related expenses could add 2-5% to '13 EPS," for both companies.

Credit management expenses are particularly high for Bank of America, "with $2.5 bil of expenses led by its $1.2 tril servicing portfolio with 13.5% delinquency ratio," and "recovery in the housing market should reduce problem loans faster (and also staff)."

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.