NEW YORK (
) -- Recent comments by
Bank of America
CFO Bruce Thompson back up the higher valuation investors place on the company over
Following a meeting with Thompson, KBW analyst Christopher Mutascio on Sunday in a note to clients wrote that Bank of America's "Management expects Legacy Asset Servicing costs to fall from $2.3 billion in 2Q13 to below $2.0 billion per quarter by 4Q13." The fourth-quarter estimate is lower than the $2.1 billion Thompson estimated during Bank of America's second-quarter earnings call on July 17.
Legacy Asset Servicing (LAS) refers to the servicing of problem mortgage loans and maintenance of repossessed real estate, with the "Legacy" mainly being that of Bank of America's ill-timed and ill-fated purchase of Countrywide Financial in 2008.
"From there, management expects the quarterly run rate to fall to $1.0 billion by 4Q14 and normalize to $500 million per quarter by 4Q15," Mutascio added. "So, between 2Q13 and 4Q15, management expects Legacy Asset Servicing costs to decrease $7.2 billion on an annualized basis."
Those are remarkable figures. While the cost savings will mainly consist of depressing rounds of layoffs, it is important to point out that the LAS staff has ballooned in order for Bank of America to work through an epic number of nonperforming mortgage loans.
CEO Brian Moynihan's "Project New BAC" efficiency program was initiated in 2011, with a goal of lowering the company's annual expenses by $8 billion. According to Mutascio, "Management expects to hit
a $6 billion (of the total $8 billion) run rate by 4Q13. On a quarterly basis,
this means the expense save run rate should be $1.5 billion by 4Q13 with an additional $500 million in quarterly cost saves coming by 4Q14."
So Moynihan's multiyear "normalization" for Bank of America can be expected to pretty much be completed by the end of 2015. The company's $8.5 billion settlement of Countrywide mortgage repurchase claims by private investors is still being contested by some investors, but the entire amount was reserved for during the second quarter of 2011, meaning that even a modified settlement is not expected to greatly increase Bank of America's expenses.
Unresolved mortgage repurchase demands against Bank of America totaled $16.648 billion as of June 30, down from $17.135 billion the previous quarter, mainly reflecting a settlement with bond insurer
. Even though $16.648 billion is a very large figure, the company "estimates that the range of possible loss for representations and warranties exposures could be up to $4 billion over accruals at June 30, 2013," according to its second-quarter 10-Q filing.
"We do not currently have an EPS estimate beyond or 2014 estimate of $1.38," Mutascio wrote. "However, if we were to assume annual operating expenses were to fall to $57.0-$58.5 billion from our 2014 estimate of $61.4 billion (assumes the potential for some natural expense creep), then
the LAS savings would represent a $0.17-$0.25 EPS benefit."
"The timing of the full EPS impact would seem to be a 2016 event since Legacy Asset Servicing costs are not expected to normalize at $500 million per quarter until 4Q15," Mutascio added.
Looking beyond the LAS cost savings, based on Thompson's comments, "one could build the company's annual
net interest income from $41.6 billion in 2Q13 to approximately $45.8 billion with the benefit of higher long-term rates ($1.0 billion with a 100 bps increase), a parallel shift in the curve ($2.3 billion with a 100 bps parallel shift) and the repayment of long term debt ($875 million if $35 billion in debt matures net of issuances)," according to Mutascio. He added "this does not take into account any balance sheet growth."
Valuation and Expected Returns
Mutascio rates Bank of America "market perform," with a price target of $15.00.
Bank of America's shares closed at $14.57 Friday and traded for 10.6 times the consensus 2014 earnings estimate of $1.38. Among the "big four" U.S. banks, only Wells Fargo trades at a similar valuation, with shares closing Friday at $42.76, or 10.6 times the consensus 2014 EPS estimate of $4.02. Citigroup's shares closed Friday at $49.83 Friday and traded for 8.9 times the consensus 2014 EPS estimate of $5.57. JPMorgan was cheapest among the group, with shares closing Friday at $52.32, or 8.6 times the consensus 2014 EPS estimate of $6.11.
Wells Fargo has been the strongest earnings performer among the "big four," with its return on average assets (ROA) ranging from 1.40% to 1.54% over the past five quarters, while its return on average tangible common equity (ROTCE) has ranged from 16.27% to 16.99%, according to
Thomson Reuters Bank Insight
JPMorgan Chase runs second, with ROA ranging from 0.88% to 1.12% over the past five quarters, with ROTCE ranging from 14.24% to 16.82%.
Citigroup's ROA over the past five quarters has ranged from 0.10% to 0.88% and its ROTCE has ranged from 1.22% to 10.19% over the past five quarters.
Bank of America has ranked last among the big four over the past four quarters, with ROA ranging from 0.6% to 0.73%, while its ROTCE has ranged from 0.85% to 10.16%.
But as investors look ahead, they see that Bank of America's consensus 2015 EPS estimate of $1.62% is 76% higher than the consensus 2013 EPS estimate of 92 cents. The other "big four" members don't come anywhere close to that level of expected earnings improvement.
Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
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.