Bank of America: Fiscal Cliff Crossed-Fingers Winner (Update 1)

Updated with market close information, stock ratios and an economic report.

NEW YORK ( TheStreet) -- Bank of America ( BAC) was the winner among the largest U.S. banks on Wednesday, with shares rising 3% to close at $11.55.

The Dow Jones Industrial Average and the S&P 500 ( SPX.X) were down slightly, while the NASDAQ Composite pulled back 1%, as investors returned from the Christmas holiday, looking forward to the return of Congress on Thursday for more negotiations on a compromise bill to avert the fiscal cliff. President Obama cut his Hawaii vacation short in order to participate in what may turn out to be a pared-down bargain to hold the line on tax increases and spending cuts, while kicking discussions of entitlement cuts -- favored by the Republican leadership of the House of Representatives -- further down the road.

Part of the discussions will no doubt be the Alternative Minimum Tax, which was enacted during the 1960's in order to ensure that upper-income taxpayers with a large amount of deductions to their adjustable income pay a minimum in federal income taxes. The problem with the AMT is that it is not indexed to inflation. This requires Congress to pass a bill each year to "patch" the AMT in order to keep its reach from expanding to millions more taxpayers.

Congress and the president had plenty of time to do their annual work on the AMT, which never had anything to do with the Fiscal Cliff. Unfortunately, the procrastination in Washington has complicated not only the Fiscal Cliff -- created in compromise between President Obama and Congress in 2011, in order to force politicians to at least address the runaway federal deficit and national debt -- but the work of the Internal Revenue Service.

Since the IRS still doesn't know how the AMT will work for 2012, everyone's favorite federal agency will have little time to update its systems to address the AMT patch, or the expansion of the AMT if no patch is passed.

Acting IRS Commissioner Steven Miller sent a letter to Congress in November and another letter last Wednesday, saying that "the most recent AMT Patch, and the exemption amounts of $74,450 for joint filers and $48,450 for single taxpayers, expired at the end of 2011," and that without a new patch for 2012, "the current-law AMT exemption amounts are much lower: $45,000 for joint filers and $33,750 for single taxpayers."

"This means that 30 million additional taxpayers will become subject to the AMT on their 2012 income tax returns."

Writing for Real Money, Jim Cramer said that "we should be going down, not up," since the type of fiscal austerity that "falling off" the fiscal cliff would bring about, as not worked in Europe. The "most likely scenario" for the markets relative strength on Wednesday morning was that "the market likes the coming together that we will see after we go over the cliff with the Republicans fighting vigorously for tax cuts and winning," he said.

The KBW Bank Index ( I:BKX) rose slightly to close at 51.15, although 13 of the 24 index components were down in midday trading.

Bank of America

Bank of America's shares have now returned a remarkable 109% year-to-date, following a 58% decline in 2011. The shares are still down 13% from the end of 2010.

The shares trade for 0.9 times tangible book value, according to Thomson Reuter Bank Insight, and for 12 times the consensus 2013 earnings estimate of 96 cents, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.25.

As economic reports continue to provide evidence of a sustained recovery in U.S. home prices, investors' confidence increases in Bank of America's ability to work through its mortgage repurchase claims with manageable losses. The company reported that as of Sept. 30, outstanding mortgage putback claims from investors totaled $25.5 billion, more than doubling from the end of 2011.

S&P Dow Jones Indices announced on Wednesday that U.S. home prices "rose 4.3% in the 12 months ending in October," according to the S&P Case-Shiller 10- and 20-City Home Price Composite Indices, although "anticipated seasonal weakness appeared as twelve of the 20 cities and both Composites posted monthly declines in home prices in October." David M. Blitzer -- chairman of the Index Committee at S&P Dow Jones Indices -- said that "annual rates of change in home prices are a better indicator of the performance of the housing market than the month-over-month changes because home prices tend to be lower in fall and winter than in spring and summer."

Investors are also increasingly confident in a significant return of capital from Bank of America, as the company builds capital. The company reported Tier 1 common equity of $136.4 billion as of Sept. 30, increasing by $9.7 billion from the end of 2011. The estimated Basel III Tier 1 common equity ratio was 8.97% as of Sept. 30, meaning the company was just a hair under its fully phased-in Basel III minimum ratio, many years ahead of the Federal Reserve's requirement.

Atlantic Equities analyst Richard Staite on Dec. 13 said that he expected Bank of America to return about $6 billion in capital to investors during 2013 through stock buybacks and an increase to the quarterly dividend on common shares from its current nominal level of a penny.

The analyst estimated that by the end of 2013, Bank of America "will have $19bn in surplus capital and falling costs should have boosted earnings. We therefore forecast it will return $14bn in 2014 composed of a $4bn dividend and a $10bn buyback. This will put it on a par with JPMorgan Chase ( JPM) where we forecast a $15bn capital return in 2014."

Staite rates Bank of America a "Buy," with a $12 price target.

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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