Bank of America
Nearly all of the recent U.S. economic reports have underlined a steady recovery of home prices, which can lift all boats among the large residential mortgage lenders, including the "big four" U.S. banks. Bank of America, of course, is the most highly leveraged to a housing recovery, because of the company's mortgage mess mainly springing from its purchase of Countrywide Financial in 2008. Bank of America had $25.5 billion in unresolved mortgage repurchase claims as of Sept. 30. In addition to the many challenges the company will bring to investors making the claims, delinquency rates will decline, and claim balances will also decline as home prices rise. In addition to those benefits, the rising home prices will make short-sales or even outright sales of the collateral properties backing the securitized loans easier, thus cancelling some putback claims.
Discounted to Book and Ready to Pay
Bank of America's shares trade for 0.8 times their reported Sept. 30 tangible book value of $13.48, while Citigroup's shares trade even lower, at 0.7 times their reported Sept. 30 tangible book value of $52.70. These discounts underline the potential for both stocks to outperform during 2013, despite their strong recoveries this year. For Citigroup, investors will be looking for the company to follow through with former CEO Vikram Pandit's "good bank/bad bank" strategy of parking noncore assets within Citi Holdings, selling them off or winding them down, while freeing up excess capital. Bank of America Merrill Lynch analyst Erika Penala on Nov. 26 estimated that following the stress tests, Citigroup will raise its quarterly dividend from the current nominal penny, to 15 cents.
Wells Fargo trades at higher valuations than Citi and BAC, reflecting the company's growing share of the mortgage lending market, as well as its strong earnings performance, with quarterly operating returns on average assets increasing to 1.46% from 1.27% over the past five quarters, according to Thomson Reuters Bank Insight. The shares trade for 1.7 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.5 times the consensus 2013 EPS estimate of $3.63, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $3.94. Based on a quarterly dividend of 22 cents, Wells Fargo's common shares had a dividend yield of 2.56%.
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