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Bank of America Has 30% Upside: Analyst (Update 1)

Updated with morning market action.

NEW YORK ( TheStreet) -- Atlantic Equities analyst Richard Staite continues to make the case for Bank of America's "near-term catalysts plus a good long-term earnings story."

After meeting in London with Bank of America CFO Bruce Thompson, Staite on Thursday reiterated his "Overweight" rating for Bank of America and $12 price target, saying that Thompson "expressed confidence that in Q4 there will be a decline in Legacy Asset Servicing costs, that mortgage delinquencies will decline and that the NIM will benefit from lower funding costs."

Following a brutal 7% pummeling on Wednesday in the wake of President Obama's reelection, Bank of America's shares led the market in morning trading on Thursday, with shares rebounding by 3% to $9.48.

Staite last month upgraded Bank of America from a neutral rating, as the company "has a bigger cost-cutting story, greater potential to reduce funding costs and faster improvement in capital ratios," relative to peers.

Bank of America's shares closed at $9.23 Wednesday, returning 67% year-to-date, following a 58% return in 2011. While the shares are trading at just 0.7 times their reported their reported Sept. 30 tangible book value of $13.48, it would appear that investors agree with Staite, since the shares trade at the highest multiple to forward earnings among the "big four" U.S. banks.

Bank of America's shares trade for 9.5 times the consensus 2013 earnings estimate of 97 cents a share, among analysts polled by Thomson Reuters. Here's a quick comparison of valuations for the rest of the big four:
  • Shares of Citigroup (C - Get Report) closed at $36.05 Wednesday, returning 37% year-to-date, following a 44% decline last year. The shares trade for 0.7 times their reported Sept. 30 tangible book value of $52.70, and for eight times the consensus 2013 EPS estimate of $4.64.
  • JPMorgan Chase (JPM - Get Report) closed at $40.46 Wednesday, returning 25% year-to-date, following a 20% decline during 2011. The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for eight times the consensus 2013 EPS estimate of $5.32. In addition to historically attractive valuations, JPMorgan's shares have an attractive dividend yield of 2.97%.
  • Shares of Wells Fargo (WFC - Get Report) closed at $32.91 Wednesday, returning 22% year-to-date, following a 10% decline during 2011. The shares trade for 1.5 times tangible book value, and for nine times the consensus 2013 EPS estimate of $3.63. Based on a quarterly payout of 22 cents, Wells Fargo's shares have a dividend yield of 2.67%. Wells Fargo higher multiple to book value reflects the company's status as the best and most consistent earner among the big four, with operating returns on average assets (ROA) improving from 1.27% to 1.46% over the past five quarters, according to Thomson Reuters.

Bank of America continues to work through its legacy mess springing from the acquisitions of Countrywide Financial in 2008 and Merrill Lynch in 2009. The company reported a weak third-quarter profit, after booking $1.6 billion in litigation expenses, mainly from the settlement of a class action lawsuit related to the Merrill Lynch acquisition, as well as a charge of $800 million related to the reduction of a U.K. tax rate, and other one-time items.

In its quarterly 10-Q filing with the Securities and Exchange Commission, the company on Friday reported that its unresolved mortgage loan repurchase claims from investors totaled $25.5 billion as of Sept. 30, increasing from $22.7 billion the previous quarter, and $11.7 billion a year earlier. Staite said that the company's estimated $6 billion in losses to spring from the mortgage putback claims "manageable, particularly if pre-provision profits start on an upward trend, but we accept it is still an overhang for investors."
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