Bank of America: Dead Cat Bounce Winner

NEW YORK ( TheStreet) -- Bank of America was the winner among the largest U.S. banks on Thursday with shares rising 2% and close at $9.39, partially recovering from Wednesday's painful 7% drop.

The broad indexes continued their post-election decline, all showing 1% declines for the session. Shares of McDonald's Corp. ( MCD) pulled back 2% to close at $85.13, after the company reported that its sales global during October were down 1.8% from a year earlier, while domestic sales declined 2.2%. CEO Don Thompson said that although "October's sales results reflect the pervasive challenges of today's global marketplace, I am confident that our strategies and the adjustments we are making in response to the current business headwinds will build sales momentum and drive sustained, profitable growth."

This was the company's first decline in monthly global sales since 2003.

McDonald's said that in the United States, "modest consumer demand and heightened competitive activity offset the impact of local Dollar Menu advertising, the Monopoly promotion, and the recent launch of the Cheddar Bacon Onion premium sandwiches. Moving forward, the U.S. remains focused on enhancing its value leadership position by balancing strong everyday value messaging with affordable premium menu options."

The KBW Bank Index ( I:BKX) was down 1% to close at 48.09, with all but three of the index components showing declines on Thursday.

Bank of America chief investment strategist Michael Hartnett early on Thursday wrote that "the macro backdrop is currently one of high liquidity and low growth. But, in 2013, we believe growth expectations will rise as stimulus gains traction and a transition from the Age of Deleveraging (2007-2012) to the Great Rotation (2013 onward) will begin in earnest, led by the US. So our core asset allocation is bullish equities and credit, bearish bonds, neutral commodities. Shorter term, post the election, the fiscal cliff is a big deterrent to risk-taking," and "the reelection of President Obama brings into focus the potentially risk-negative subjects of taxation and financial regulation."

Hartnett said that "analyst Phillip Middleton estimates that Wall Street could see an additional $2.4 trillion of collateral requirements due to tighter financial regulation. This could lead to weaker credit creation and activity."

JPMorgan Announces Buybacks

In its third-quarter 10-Q filing, JPMorgan Chase ( JPM) on Thursday announced that on November 5, the Federal Reserve approved the company's revised capital plan, allowing the company to repurchase up to $3 billion in common shares during the first quarter of 2012.

Following the Fed's last round of annual bank stress tests in March, the regulator approved JPMorgan's plan to repurchase up to $12 billion in shares during 2012, followed by $3 billion in buybacks during 2013. After JPMorgan CEO James Dimon first announced in May that the company was looking at a large second-quarter hedge trading loss, the repurchase program was suspended, after the company bought back roughly $1.6 billion in common shares.

JPMorgan's stock was down slightly to close at $40.40. The shares have now returned 25% year-to-date, following a 20% decline during 2011.

The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for eight times the consensus 2013 EPS estimate of $5.32, among analysts polled by Thomson Reuters.

Based on a quarterly payout of 30 cents, JPMorgan's shares have a dividend yield of 2.97%.

JPM Chart JPM data by YCharts

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

Bank of America

Bank of America's shares have now returned 69% year-to-date, following a 58% decline during 2011.

The shares trade for 0.7 times their reported Sept. 30 tangible book value of $13.48, and for 10 times the consensus 2013 EPS estimate of 97 cents.

Following a meeting with the company's CFO Bruce Thompson, Atlantic Equities analyst Richard Staite on Thursday reiterated his "Buy" rating for Bank of America, with a $12 price target, saying that Thomson had "expressed confidence that in Q4 there will be a decline in Legacy Asset Servicing costs, that mortgage delinquencies will decline and that the net interest margin will benefit from lower funding costs."

Staite last month upgraded Bank of America from a neutral rating, as the company "has a bigger cost-cutting story, greater potential to reduce funding costs and faster improvement in capital ratios," relative to peers.

During the third quarter, two bright spots for Bank of America's long suffering investors were widening of the net interest margin to 2.27% from 2.15% the previous quarter, according to Thomson Reuters Bank Insight. This ran counter to the majority of large industry players, in the difficult interest rate environment. With the Federal Reserve keeping its target short-term federal funds rate in a range of zero to 0.25% since the end of 2008, most banks have already seen the majority of funding cost savings. Meanwhile the Fed in September increased its monthly purchases of long-term mortgage-backed securities by $40 billion, in an effort to hold long-term rates at their historically low levels.

Staite said that "BAC is somewhat unique among peers in having more high-cost long-term debt inherited from Countrywide and Merrill Lynch. However, this is running off ($28bn expected in 2013), resulting in a decline in funding costs."

Bank of America reported an estimated Basel III Tier 1 common equity ratio of 8.97% as of Sept. 30, which was the highest among the "big four" U.S. banks, compared to 8.6% for Citigroup ( C), 8.4% for JPMorgan Chase, and 8.02% for Wells Fargo ( WFC). Staite said that "we think that the ratio could continue to improve," and that Thomson "highlighted deferred tax asset utilization, PE sales, financial investment sales, structured credit run-off and reduced mortgage delinquencies as factors to consider."

While Staite didn't predict that Bank of America would increase its dividend from the current nominal quarterly payout of a penny a share, or seek Federal Reserve permission for common share buybacks during 2013, Deutsche Bank analyst Matt O'Connor on Tuesday estimated that Bank of America would return a total of $2.981 billion to common shareholders next year, through $1.481 billion in dividends, plus $1.500 billion in share buybacks.

BAC Chart BAC data by YCharts

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.


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

>Contact by Email.

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 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.

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