5 Reasons to Sell Bank of America Now

NEW YORK ( TheStreet) - While it may seem like a bad time to sell Bank of America's ( BAC) shares, there are other similarly-valued bank stocks to be found with a much less downside risk for investors.

Shares of the nation's largest bank holding company closed at $6.19 Friday, and even though they were up 5% last week, the shares were down 53% year-to-date.

Following a second-quarter net loss to common shareholders of $9.1 billion, or 90 cents a share, Bank of America will announce its third-quarter results on Tuesday, with analysts polled by FactSet expecting the company to post earnings of 28 cents a share.
Bank of America CEO Brian Moynihan

Bank of America's shares traded on Friday for less than half the company's June 30 tangible book value of $12.65, according to SNL Financial. The shares were also historically cheap to forward earnings, trading for just 5.6 times the consensus 2012 EPS estimate of $1.12, according to analysts polled by FactSet.

In comparison, as of Friday's market close, shares of Citigroup ( C) were trading for 0.6 times tangible book value and six times the consensus 2012 earnings estimate, according to SNL Financial, while the remaining "big four" members JPMorgan Chase ( JPM) traded just below tangible book and for 6.1 times forward earnings, and Wells Fargo ( JPM) traded for 1.5 times tangible book and 7.9 times the consensus forward earnings estimate.

Digging just a little deeper shows that Bank of America is actually held in much lower regard than Citi, despite their similar valuations relative to book value. Bank of America's tangible common equity ratio was 5.87% as of June 30, while Citigroup's was a much higher 7.52%, which was the highest among the "big four" U.S. bank holding companies.

When comparing the increasingly important Tier 1 common equity ratios, which regulators are focusing on as the largest banks work on meeting the enhanced Basel III capital requirements, Bank of America was the lowest among the "big four" as of June 30, at 8.23%, while Citi was again highest, at 11.62%, according to SNL.

Here are 5 reasons to sell Bank of America now:

5. They can't shoot straight.

Bank of America will never live down being the "industry innovator" in planning to charge its checking account customers -- who provided $305.3 billion in interest-free funding according to the company's June 30 Federal Reserve filing -- a $5 monthly fee for using their debit cards to make purchases.

Yes, Moynihan sort-of explained in in his fast-talking explanation when interviewed by Lawrence Kudlow on CNBC that most customers would "get out of this fee," which was directed toward customers "that don't have their total relationship with us," but that didn't change the headlines.

The last thing Bank of America needs right now, when it is on the hook for such a huge portion of the mortgage mess, is for protestors to have such an easy, simple, grievance to focus on.

4. Headline risk and a political "target on the back."

Even before considering the frightening numbers related to investors' demands for Bank of America to repurchase nonperforming securitized mortgages, the company is a prime target for the beloved protestors of the Occupy Wall Street movement and for politicians.

As the nation's largest mortgage lender and largest mortgage loan servicer, Bank of America is easy pickin' for anybody with a beef over the mortgage foreclosure mess. Of course, despite all the well-documented sloppiness in the way the company and its competitors were handling foreclosure filings, there haven't been substantial reports of borrower who were current in their loan payments being force out of their homes, but it doesn't matter. The momentum is there, and it will continue to be painful for some time.

And in the wake of Bank of America's $5 monthly fee for (some) customers using their debit cards to make purchases, as a way of recouping some of the revenue sure to be lost beginning in the fourth quarter from the Federal Reserve's rules limiting interchange fees charged to merchants to process debit card purchases as part of his amendment to the Dodd Frank Wall Street Reform and Consumer Protection Act, a comment by Senator Dick Durbin (D-Ill.) on the Senate floor that the bank's customers should "vote with your feet, get the heck out of that bank," shows that the opportunistic bashing of the company is bound to continue, in a very public way.

3. Unknown mortgage putback risk.

Most of Bank of America's trouble springs from former CEO Ken Lewis's disastrous purchase of Countrywide in July 2008, and all the subsequent demands from mortgage-backed securities investors for Bank of America to repurchase nonperforming securitized loans.

After Bank of America in June announced an $8.5 billion agreement with institutional investors "to resolve nearly all of the legacy Countrywide-issued first-lien residential mortgage-backed securitization (RMBS) repurchase exposure," investors breathed a sigh of relief. But after the company reported the $9.1 billion second-quarter net loss to common shareholders, which included $14.5 billion in losses in the company's Real Estate Services unit, the Countrywide-related bad news just kept on coming, including lawsuits by American International Group ( AIG), a subsidiary of U.S. Bancorp ( USB), Goldman Sachs ( GS), and the Federal Deposit Insurance Corp.

On Sept. 2, the Federal Housing Finance Agency -- which regulates Fannie Mae ( FNMA) and Freddie Mac ( FMCC), which were taken under government conservatorship in September 2008 -- sued 17 banks over mortgage losses, demanding "full rescission and recovery" of damages suffered by the government-sponsored mortgage giants from $57.5 billion in securities sales by Bank of America and subsidiaries, including $26.6 billion in mortgage-backed securities sold to the GSEs by Countrywide before it was acquired by Bank of America, and $24.9 billion sold to Fannie and Freddie by Merrill Lynch and its subsidiaries, before Merrill was acquired by Bank of America in 2009.

With so much in play, including the above mentioned lawsuits, as well as ongoing negotiations over the foreclosure mess, between the largest mortgage servicers, the state attorneys general and the federal bank regulators, there's simply no way to estimate Bank of America's ultimate risk from the Countrywide disaster.

2. Possibility of additional dilution.

In hindsight, Moynihan's former plan to begin returning capital this year, was a pipe dream.

Under the Basel III standards, Bank of America needs to achieve a Tier 1 common equity ratio of at least 9.5% -- including a 2.5% capital conservation buffer -- by January 2019. Last month, Atlantic Equities analyst Richard State said that while the company was "technically correct" in estimating it would have a Tier 1 common ratio of 9.6% at the end of 2014, that wouldn't be "sufficient" as the company "needs strong ratios to keep funding costs low and keep the confidence of counterparties."

Staite said that investors were looking for the company to come "closer to meeting full Basel III requirements by the end of 2012." Otherwise, according to the analyst, Bank of America would face rising funding costs and lower net interest margins, "making it less competitive."

So the prospect of a dilutive capital raise is on the table for investors, at least until there are significantly more settlements of mortgage-related suits and negotiations, and a clearer estimate of the company's ultimate mortgage losses.

1. Citigroup offers a better ride for recovery.

While its shares are similarly priced to book value, Citigroup faces far less overhang from the mortgage crisis, as the company continues working through CEO Vikram Pandit's "good bank/bad bank" strategy to wind-down non-core assets.

With a much stronger capital base, Citigroup looks to be a smoother ride for long-term investors with confidence in economic recovery, and is also a diversified international play.

Even with Bank of America's shares tanking so much this year, selling the shares now and moving over to Citi could pay off handsomely.

-- Written by Philip van Doorn in Jupiter, Fla.

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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 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.