Updated from 3:37 p.m. EDT
Bank of America
shares were up sharply Monday morning after an analyst said he expects the stock to rise on strong earnings and a completion of the firm's public offering.
The stock closed up 9.9% to $11.73 , after Goldman Sachs analyst Richard Ramsden upgraded it to buy and set a price target of $15, implying a potential return of 41% from the previous close. Bank stocks were rallying amid an upswing in the broad market on positive economic news and better-than-expected results from
. However, BofA shares sailed higher than most other stocks, leading most fellow components of the
Dow Jones Industrial Average
by a wide margin, other than
Despite that surge, Fitch Ratings downgraded BofA due to "headwinds" the company faces from weak asset quality and potential capital needs. Those were also factors that Ramsden cited as risks to his bullish view.
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Ramsen estimated that BofA is about halfway through its offering of 1.25 billion new shares, the issuance of which has dragged on its share price, due to an increase in supply. Additionally, the analyst expects Bank of America to report second-quarter earnings of 25 cents per share, far higher than the average estimate of a penny per share, according to Thomson Reuters.
"Our optimism is based on another solid mortgage and capital markets quarter, given observable activity levels since March," writes Ramsden. "As confidence over
BofA's ability to earn its way out of the cycle increases, we see the valuation continuing to shift to discounted, normalized, and diluted (DND) earnings -- our model for which generates our 12-month $15 price target."
Another factor that stands to support shares is BofA's planned exchange of preferred equity for common, which Ramsden expects to begin after the public offering is complete. Given the firm's "success" in the offering, which offered shares in portions at market prices, Ramsden says the discount to preferred investors may be greater, resulting in less dilution for common stockholders.
Ramsden also estimates that BofA's sale of $7.3 billion worth of its stake in China Construction Bank will offer $5.3 billion in pre-tax tangible book value, and "should help offset another quarter of significant credit costs."
Despite that gain, Fitch called BofA's stress test requirement to raise $33.9 billion in common equity in less than six months is "a daunting task in any environment," which has a "heightened level of execution risk."
Success in reaching the goal requires market access, ability to arrange sales of other units at a sufficient price, and maintenance of earnings above SCAP projections," says the credit rating agency's report. "Fitch believes that near-term earnings may be the most difficult of these three factors."
Fitch lowered its ratings on preferred securities to B from BB and trust preferred securities to BB- from BB, saying there is an increased risk of BofA halting or deferring its dividend on those holdings. Both are now on ratings watch negative.
The agency also downgraded BofA's individual rating to D from C/D and removed it from rating watch negative, which means the firm has an elevated vulnerability to a deterioration in credit quality and distressed markets, but still has "some remaining margin of flexibility."
BofA's long- and short-term IDR ratings were affirmed at A+/F1+, with a stable outlook, due to government support. Fitch also affirmed ratings on senior, subordinated, and deposit instruments for all entities, as well as its 1 support rating and A+ support floor rating.
Separately, a Monaco-based hedge fund became the latest to blast Bank of America CEO Ken Lewis for not disclosing more to investors about BofA's recent acquisitions.
According to the
, SRM Global, which owned 50 million shares of Countrywide worth $500 million, filed a motion in Delaware court to sue Lewis and former top Countrywide officials, including CEO Angelo Mozilo. The fund alleges that the executives knew, but did not disclose, the extent to which Countrywide was in trouble.
Bank of America acquired the mortgage lender last year as it neared collapse from bad housing debt.