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

Stocks in this article: BAC C JPM WFC

Bank of America continues to dispute mortgage repurchase claims from Fannie Mae (FNMA), but Staite said "a settlement could be positive."

Two third-quarter bright spots for the company were its capital strength and its net interest margin, which is the difference between the average yield on loans and investments and the average cost for deposits and borrowings.

Bank of America reported an estimated Basel III Tier 1 common equity ratio of 8.97%, which is the highest among the big four, compared to 8.6% for Citigroup, 8.4% for JPMorgan Chase, and 8.02% for Wells Fargo. Staite said that "we think that the ratio could continue to improve," and that Thomson "highlighted deferred tax asset utilization, PE sales, financial investment sales, structured credit run-off and reduced mortgage delinquencies as factors to consider."

While Staite didn't offer any predictions on an increased return of capital to investors during 2013, Deutsche Bank analyst Matt O'Connor on Tuesday estimated that Bank of America would return a total of $2.981 billion to common shareholders next year, through $1.481 billion in dividends, plus $1.500 billion in share buybacks. The analyst expects Bank of America's 2013 dividend yield on common shares to be 1.3%. The company is currently paying a nominal quarterly dividend of a penny a share.

With the Federal Reserve keeping its target short-term federal funds rate in a range of zero to 0.25% since the end of 2008, most banks have already seen the majority of funding cost savings. Meanwhile the Fed in September increased its monthly purchases of long-term mortgage-backed securities by $40 billion, in an effort to hold long-term rates at their historically low levels.

Bank of America's net interest margin widened to 2.27% during the third quarter from 2.15% in the second quarter, according to Thomson Reuters Bank Insight, although the margin was still quite narrow, when compared to 2.42% for JPMorgan Chase, 2.84% for Citigroup, and 3.62% for Wells Fargo. Staite said that "BAC is somewhat unique among peers in having more high-cost long-term debt inherited from Countrywide and Merrill Lynch. However, this is running off ($28bn expected in 2013), resulting in a decline in funding costs."

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