Bank of America's Kitchen-Sink Fourth Quarter
Bank of America ( BAC) led off a big day for the banking industry, announcing the end of its year-long battle with Fannie Mae ( FNMA), agreeing to pay the government-sponsored mortgage giant $3.6 billion in cash and also repurchase $6.75 billion in mortgage loans that it (or Countrywide Financial, acquired by BAC in 2008) had originated and sold to Fannie before 2008. Bank of America said that the Fannie Mae settlement would be covered by its existing reserves, plus "an additional $2.5 billion (pretax) in representations and warranties provision recorded in the fourth quarter of 2012." Bank of America said that the Fannie Mae settlement would lower its fourth-quarter earnings by $2.7 billion, but the company wasn't through announcing one-time items for the quarter. The company said that the fourth-quarter results would also be "negatively impacted by approximately $2.5 billion (pretax) for the independent foreclosure reviews, litigation (primarily mortgage-related), and other mortgage-related matters." Bank of America also announced that Fannie Mae, Freddie Mac ( FMCC) and Ginnie Mae had approved its plan to sell servicing rights on 2 million residential mortgage loans, with unpaid balances totaling $306 billion. About 232,000 of the loans for which servicing rights will be transferred are past due 60 days or more. The transfer of mortgage servicing rights will "occur in stages over the course of 2013," and Bank of America expects the transfers to "have a benefit over the book value of the mortgage servicing rights of approximately $650 million," with about one half of the benefit being booked in the fourth quarter. The company said that it expects "earnings per share to be modestly positive for the fourth-quarter of 2012," factoring-in a $1.3 billion tax benefit from the recognition of foreign tax credits and "approximately $700 million of pretax negative debit valuation adjustments (DVA) and fair value option (FVO) adjustments related to the continued improvement in the company's credit spreads."
More Cash for Foreclosure Foul-Ups
The Independent Foreclosure Review was part of a previous mortgage foreclosure settlement between Bank of America and other large mortgage servicers, including Citigroup ( C), JPMorgan Chase ( JPM), Wells Fargo ( WFC), U.S. Bancorp ( USB), PNC Financial Services Group ( PNC) and SunTrust ( STI), with the Federal Reserve and the Office of the Comptroller of the Currency. The two regulators on Monday announced that the foreclosure review had ended with the servicers subject to the foreclosure settlement agreeing make $8.5 billion in cash payments and other assistance to borrowers victimized by servicing errors. Borrowers could receive up to $125,000 each.
Capital One's shares have now returned 9% year-to-date, following a 38% return during 2012. The shares trade for 1.7 times tangible book value, according to Thomson Reuters Bank insight, and for nine times the consensus 2013 EPS estimate of $7.02, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $7.39.
Morgan Stanley was the Monday's loser among the largest U.S. Banks, with shares sliding 2% to close at 19.80. The shares have now returned 4% year-to-date. The shares returned 28% during 2013, following a 44% decline during 2011. The shares trade for 0.7 times their reported Sept. 30 tangible book value of $26.65, and for 10 times the consensus 2013 EPS estimate of $1.99. The consensus 2014 EPS estimate is $2.33. Morgan Stanley pays a quarterly dividend of a nickel a share, and investors are sure to be wondering whether or not the company will request Federal Reserve permission to increase its return of capital to investors, as part of the regulator's next round of annual stress tests, which will be completed in March. Bank of America Merrill Lynch analyst Michael Carrier has a neutral rating on Morgan Stanley, with a $20 price target, saying in November that there could be "upside potential" for Morgan Stanley to pay out a higher percentage of earnings, following the stress tests. Then again, the analyst also said that the possible regulatory approval for the company to complete its purchase of Citigroup's entire remaining stake in the Morgan Stanley Smith Barney joint venture could "mostly replace" common share buybacks.
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