Bank of America's shares returned 69% year-to-date, through Tuesday's close at $9.36. Even after this year's run-up, the shares remain discounted at 0.7 times their reported Sept. 30 tangible book value of $13.48, but they also trade for the highest forward P/E among the "big four" U.S. banks, at 9.9 times the consensus 2013 EPS estimate. Ramsden said that Bank of America's "valuation appears reflective." Of course, Bank of America's earnings can take another big hit at any time, and the company also faces the lingering headline risk associated with investors' mortgage putback demands, and other actions associated with the company's purchase of Countrywide Financial in 2008. The company is a political pin-cushion, especially in the middle of election season. The Department of Justice on Wednesday filed a civil complaint against Bank of America, alleging that "Countrywide and later Bank of America, following the acquisition of Countrywide in 2008, implemented a new origination process called 'Hustle,' which was intentionally designed to process loans at high speed and without quality checkpoints, and which generated thousands of fraudulent and otherwise defective residential mortgage loans sold to Fannie Mae ( FNMA) and Freddie Mac ( FMCC) that later defaulted causing over $1 billion dollars in losses and countless foreclosures." The tone-deafness in naming an accelerated mortgage loan approval process "Hustle," shows just how out-of-control the mortgage lending business was, during the real estate bubble. So what does all this mean to the investor? It depends on your investment horizon. Long-term investors could see a very nice buying opportunity this quarter, and not only Citi, JPMorgan and Wells Fargo.
A Glass Half Full
Guggenheim securities analyst Marty Mosby agrees that "we do have a looming fiscal cliff in front of us, which can disrupt the path to recovery we have all seen going forward," and says that a lack of direction on resolving the fiscal cliff "will weigh on cyclical industries like financials. But once that pressure is reconciled, there is upside potential that each earnings season is generating." Mosby also says that with "the run-up that we have had in the sector" can leave investors wondering, "why leave ourselves out there, when it looks like the net interest margin compression accelerating.? This can push investment managers to move their money somewhere else though year-end. There is also heightened anxiety going into the election." "You have natural pressure out there, and people are trying to get in the way of that," he says. But Mosby isn't buying the notion that it's been a lousy third quarter for banks. "Going into the quarter, we anticipated that operating earnings would be 2% stronger than the estimates. The estimates expected a 2% improvement, we expected 4%, and we have seen 5% to 6% in sequential growth," he says. As we have gone through the quarter, none of the operating numbers have shown any surprises," Mosby says, but "on the other hand, what we have seen is more of a dose of net interest margin compression, which has triggered what we think is anxiety over the impact of this low interest rate environment."