Bank of America Needs to Earn Its $10 Spot

NEW YORK (TheStreet) - Bank of America ( BAC) shares are up 76% year to date as they try to regain $10, but questions remain about whether the bank can grow earnings at a sufficient clip to sustain the rally.

Annual earnings growth of 9.78% over the next 15 years is already priced into the shares of Bank of America, according to a Keefe, Bruyette & Woods research report published Monday, while both JPMorgan Chase ( JPM) and Wells Fargo ( WFC) share prices imply a growth rate of roughly 6%. KBW has "outperform" ratings on both Wells Faro and JPMorgan, while it rates Bank of America "market perform."

Bank of America has been shrinking and selling off assets in order to bolster its balance sheet against housing-related shocks. While those efforts have reassured investors and regulators that Bank of America can survive without significant new equity issuance, there are still doubts about the bank's earnings strength.

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Stifel Nicholaus analyst Chris Mutascio, for example, cut his estimate of "normalized" earnings at Bank of America to $1.14 from $1.85 following its fourth quarter earnings report, pointing to lower fee income, a higher share count, higher operating expenses and a smaller balance sheet. Unlike his peers, who have an earlier time table, Mutascio believes it will take Bank of America until 2014 to reduce operating expenses to where they need to be to earn $1.14 per year. Mutascio sees Bank of America earning just $0.80 in 2013.

Barclays Capital analyst Jason Goldberg has a slightly higher $1.00 earnings estimate for Bank of America in 2013, though his target price of $10 for the bank's shares is just over 2% higher from where the shares closed on Friday.

If Bank of America sees a "faster than anticipated" wind down of its legacy mortgage portfolio and credit metrics continue to improve, Goldberg believes the shares would be worth $12. That scenario arguably is starting to play out.

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However, if housing declines another 10-15% and mortgage losses are worse than expected, Goldberg believes Bank of America shares could return to the $5 mark.

Bank of America is likely to get some help, however, if long-term Treasury rates sustain their recent rise.

In a report published Monday, Stifel's Mutascio argued the "recent rise in long term rates could drive an upward revaluation in mortgage servicing assets, as cash flows on mortgages extend for those loans that are not likely to be refinanced."

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Mutascio argued such a revaluation "would be a positive development for Wells Fargo and JPMorgan Chase, and to a lesser degree Bank of America."

-- Written by Dan Freed in New York.

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