BofA's Merrill Woes Stoke Debate on Stock
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CHARLOTTE, N.C. (
) -- Investors are divided over whether the overhang from
Bank of America's
(BAC) - Get Report
Merrill Lynch
woes has created a buying opportunity or raised red flags of stock pressure ahead.
The Charlotte, N.C.-based banking giant is
from an array of government agencies - from a state attorney general to the Federal Bureau of Investigation. It is also facing at least 21 lawsuits from investors who feel misled by the bank's lack of disclosure.
But investors want to know: Other than heightened legal costs and potential fines, will any of it hurt the bank's business, and therefore its stock potential?
No, says Morgan Stanley analyst Betsy Graseck, who calls BofA her 'top-pick' of large-cap banks, "based on skew to capital markets, consumer loan book skew, and attractive valuation."
Rochdale Securities analyst Richard Bove agreed in a note Monday evening, boosting his price target to $25 from $19 following a day of big news about the
and other steps BofA has taken to
and
wean itself from government support
.
"Bank of America's business definitely improved due to this merger," says Bove, who rates the stock a buy. "It can be demonstrated that Merrill brought tens of billions in revenues to Bank of America. There was a huge material impact on the bank; all of which is easily calculated; all of which is positive."
Aside from the legal questions, bulls were also bolstered by the firm terminating some government support yesterday. BofA paid $425 million to extinguish implied government guarantees for a large chunk of toxic asset holdings and said it has received permission to exit the FDIC's debt guarantee program, though not the Treasury Department's bailout program yet.
Another bullish factor relates to the large book of bad assets that Merrill brought to Bank of America. Merrill was a top underwriter of complex investment products called collateralized debt obligations. The
Financial Times
reported on Tuesday that banks have recently been able to liquidate an increasing amount of CDOs. The unwinding of these assets adds support to the bullish view of BofA, Jim Cramer said on
RealMoney.
The predictions of analysts and spectators have been
notoriously off point
throughout the financial crisis. Some feared that BofA could be nationalized during the turmoil -- implying its shares would fall to nothing. More recently, few predicted the sharp turnaround in the company's first-quarter results, though many of the drivers were evident beforehand.
Still, the varying opinions can provide a good gauge of market sentiment, and Graseck, Bove and Cramer are not alone. Of 27 analysts who rate the stock, a majority -- 16 -- have buy ratings. Ten others advise selling the shares, and a single analyst has a hold rating.
The stock's performance so far this year has rewarded positive sentiment. BofA shares have climbed 23% in 2009, and are up 31% this quarter, closing Monday's session at $17.25. The stock was trading 2.2% higher to $17.63 on Tuesday afternoon but, including that gain, it's still roughly flat for what's already been a busy week of headlines.
Investors hoping for further appreciation should take caution, however. Even bullish analyst reports regarding BofA are rife with uncertainty. For instance, Bove suggests the firm may have to divest Merrill or fire top officials if its legal issues don't abate - either of which could markedly change its competitive position, its strategy, or its ability to earn.
Wells Fargo analyst Matthew Burnell took a cautious stance, highlighting concerns about the company's upcoming trial with the
Securities and Exchange Commission
. Now that federal Judge Jed Rakoff has rejected a proposed settlement of $33 million, the SEC may get more aggressive with its fines or impose other types of restrictions.
"Though predicting the outcome of what could be a prolonged and high-profile case is challenging at best, we believe the possibility could result in increased uncertainty for Bank of America's shares," says Burnell, who rates BofA stock a hold.
Burnell also notes that, while BofA would like to repay about $20 billion worth of bailout funds, CFO Joe Price confirmed yesterday that regulators have yet to give the bank the green light. The move wouldn't fully repay government investments in BofA, as
JPMorgan Chase
(JPM) - Get Report
,
Goldman Sachs
(GS) - Get Report
or
Morgan Stanley
(MS) - Get Report
have done, since the feds have another $25 billion worth of TARP funds in BofA preferred stock. However, it would shift BofA from the category of banks that require "special assistance" like
Citigroup
(C) - Get Report
, and put it in line with competitors like
Wells Fargo
(WFC) - Get Report
.
David MacDougall of TheStreet.com Ratings is positive on
long-term potential because the company is so large, operating in a broad range of businesses, and the government will not allow it to fail.
In other words, Bank of America's position as the biggest bank in the country with a big chunk of explicit government support has effectively wiped out Lehman-like concerns. This perception provides at the very least a short-term safety net for the stock, if not immediate growth potential for the business. If one subscribes to MacDougall's view, once those TARP dollars are gone, BofA could be viewed as less safe, but it may also have more room to grow.
-- Written by Lauren Tara LaCapra in New York
.
