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Bank of America Leads Sector Down, Expects Slower Loan Growth

Stocks in this article: BAC I:BKX

NEW YORK (TheStreet) -- Bank of America (BAC) was the loser among major U.S. bank stocks on Friday, with shares down 2% to close at $16.81.

The broad indices all ended lower, as investors continued to worry over the land-grab in Ukraine engineered by Russian President Vladimir Putin.

There will be a referendum in Crimea on Sunday over whether or not the semi-autonomous region will split from Ukraine and become part of Russia, with voting conducted under the watchful eye of Russian troops pretending not to be Russian troops. U.S. Secretary of State John Kerry has given Russia until Monday to back down or face sanctions, but with so much on the line economically, including a major supply of Western Europe's winter heating fuel, it seems doubtful that the United States or other nations will bring serious sanctions to bear against Russia.

Back home, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 79.9 in Marc from 81.6 in February. The March reading was the fourth-straight decline, and was way below the consensus estimate of 82.0, among analysts polled by Thomson Reuters.

The KBW Bank Index (I:BKX) was down 0.5% to 69.54, with all but seven of the 24 index components ending with declines. The index has risen slightly this year, following a 35% gain in 2013 and a 30% gain during 2012.

Slowing Loan Growth

Shares of Bank of America have returned 8% this year, following a 34.5% return during 2013. The shares trade for 1.2 times their reported Dec. 31 tangible book value of $13.79, and for 10.4 times the consensus 2015 earnings estimate of $1.62, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.32.

JPMorgan analyst Vivek Juneja rates Bank of America "outperform," with a price target of $18.00, estimating the company will earn $1.41 a share this year, with EPS rising to $1.68. Following a meeting with Alastair Borthwick, the head of BAC's Global Commercial Banking (GCB) unit, Juneja in a note to clients on Friday wrote that the GCB was expecting loan growth "to trend a little above GDP Growth" this year, which would be a major decline from 11% loan growth during 2014.

That being said, GCB is a strong performer, according to Juneja, with a "solid" return on equity, with management expecting "ROE of 15%-20% long term (based on higher capital allocation than currently), similar to peers and consistent with overall high teens ROE for Global Banking segment."

The next major banking industry event, and a possible catalyst for Bank of America's shares, will be the Federal Reserve's announcement of results of its annual stress tests on March 14, followed by the even more important -- for investors -- announcement of CCAR results on March 20.

CCAR stands for Comprehensive Capital Analysis and Review, which is essentially a second set of stress tests, incorporating large banks' plans to deploy excess capital through dividend increases, share buybacks and acquisitions.

KBW analyst Christopher Mutascio estimates Bank of America will receive approval from the Fed to raise its quarterly dividend to 5.75 cents a share from a penny, and to be approved for up to $7.2 billion in share repurchases. Following last year's stress tests, the company was approved to buy back up to $5 billion in common shares and $5.5 billion in preferred shares. Mutascio estimates Bank of America will have bought back a net $3.514 billion in common shares from the second quarter of 2013 through the first quarter of 2014.

Mustascio has a "market perform" rating on Bank of America, with a price target of $18.50.

This chart shows the performance of Bank of America's stock against the KBW Bank Index and the S&P 500 since the end of 2011:

BAC Chart data by YCharts

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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 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.

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