Bank of America story updated to include comments from Bank of America and additional analysts.
NEW YORK (
) -- Today is a bullish day. Stocks are up. Europe is (relatively) quiet. And a Bank of America asset sale has the shares zooming higher.
But let's not forget why Bank of America shares have lost nearly 44% year to date: their impossible-to-quantify mortgage exposure.
If you think the sale of an $8.6 billion credit card business is going to end the negativity around this stock, you are sadly mistaken.
Shares fell more than 20% Monday
Ken Crawford, portfolio manager overseeing $1.2 billion in assets at Argent Capital Management in St. Louis, Missouri, says Bank of America's sale of its credit card business does not sound like the kind of transaction that will make investors more comfortable with the risks the bank faces.
"That's not a big part of their portfolio, overall," Crawford says.
He was also somewhat surprised the bank would sell a business with such strong growth prospects.
"The growth in the credit card business will be likely be faster than plain old vanilla lending. If you want growth coming from the company, I would have thought credit cards had more promise than not, though I don't know what the risk weighted asset considerations are. I'm sure they've got a good handle on that."
Still, Argent has largely been steering clear of most financial stocks due to concerns new regulations will put a serious dent in profits.
But Bank of America's mortgage exposure has been the big worry for lots of investors. The bank could easily face
from investors in bonds backed by home loans that in many cases were fraudulent or did not meet the criteria originally promised.
Bank of America spokesman Jerome Dubrowski argues the $500 billion figure,
"grossly overstates the liability that Bank of America faces from potential representations and warranties claims and confuses the unpaid principal balance of the loans from potential losses."
misinterpreted the Deutsche Bank report.
Bank of America argues that the number cited in the Deutsche Bank report represents the "entire amount of loans issued between 2004 and 2008," a majority of which are performing.
"Second, it also assumes that all losses are caused by breaches to the representations and warranties, which is simply inaccurate," the Bank of America spokesman says via email. "Finally, any claims would be based on actual losses incurred by investors and not the unpaid balance as there is underlying collateral behind each of these loans."
Bank of America has set aside nearly $28 billion to address its exposure to this issue.
So now Bank of America says it has raised another $8.6 billion by selling its Canadian credit card portfolio to
TD Bank Group
. Bank of America adds this deal will close in the fourth quarter and "is expected to have a positive impact" on the bank's capital ratios.
Let's say the entire $8.6 billion Bank of America has raised is used to strengthen the capital ratios--something the cautious "expected to have a positive impact" language would seem to render unlikely.
That would still give Bank of America $36.6 billion to offset what could easily be more than $500 billion in MBS putback claims. Since we have no way of knowing how many of these putback claims are likely to result in payouts from Bank of America, those inclined to be skeptical about the bank's prospects are sure to remain that way.
Michael Yoshikami, CEO of YCMNET Advisors, which does not own shares of Bank of America, told
via e-mail that though the announcement of the intended sale is "a step in the right direction," he wants to know more about possible mortgage-related downside before he would consider investing.
"I'm still not interested in this stock," he wrote.
A report from Evercore analyst Andrew Marquardt wrote in a note published Monday he expects additional sales, including part of the bank's stake in China Construction Bankl, additional mortgage servicing rights and the remainder of Bank of America's non-US credit card stake, worth some $17.4 billion.
"These actions, along with core earnings power and a favorable time frame for new capital guidelines, support our view (and mgmt's) view that additional capital raise concerns are overblown," the report states.
In a report published Monday, Rochdale Securities analyst Dick Bove expressed confidence Bank of America will not need to raise new equity to address mortgage-related claims.
Still, he urged investors to consider Bank of America's preferred stock as opposed to the common shares, on which he has a "neutral" rating.
"If management is wrong and the company is forced to issue more common stock, (not expected) the cash available to protect the preferred dividend will increase," he wrote.
Written by Dan Freed in New York
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.