Bank of America: Analyst Downgrade Loser

NEW YORK ( TheStreet) -- Bank of America ( BAC) was loser among the largest U.S. banks on Wednesday, with shares declining by 5% to close at $11.43.

The broad indexes all ended with slight gains after Alcoa ( AA) kicked off earnings season after Tuesday's market close by reporting fourth-quarter net income of six cents a share on $5.9 billion in revenue. The bottom line match the consensus estimate among analysts polled by Thomson Reuters, but revenue beat the $5.6 billion estimate.

The KBW Bank Index ( I:BKX) was down 1% to close at 52.89, with winners and losers roughly split.

Shares of Comerica ( CMA) of Dallas were down 1% to close at $31.60, after Oppenheimer Securities analyst Terry McEvoy on downgraded the company to a "Perform" rating from "Market Perform," saying that the recent rise in long-term rates would do nothing for the stock. McEvoy on Wednesday also upgraded KeyCorp ( KEY) to "Outperform" from "Perform," with a price target of $11.00, citing the company's improved geographic strategy. KeyCorp's Shares also pulled back 1% to close at $8.90.

Both of these ratings actions are discussed in more detail in TheStreet's earnings preview for regional banks, as is the Wednesday announcement by PNC Financial Services Group ( PNC) of several one-time items that will lower third-quarter earnings by 47 cents a share. PNC's shares declined slightly to close at $60.17.

Bank of America's Downgrade

Bank of America's shares have now declined by 2% during 2013. The shares rose 110% during 2012, after dropping 58% during 2011.

The shares trade for 0.9 times their reported Sept. 30 tangible book value of $13.48, and for 11.8 times the consensus 2013 earnings estimate of 97 cents, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.27.

Bank of America's forward price-to-earnings ratio is rather high when compared to the rest of the "big four" banking club, and even looks high when compared to the high-flying U.S. Bancorp ( USB), which was trading for just 10.8 times the consensus 2013 EPS estimate of $3.08 when the shares closed at $33.27 on Wednesday.

And none of the big four have come close to matching USB's stellar return on average tangible common equity of 21.60%, according to data supplied by Thomson Reuters Bank Insight.

Credit Suisse analyst Moshe Orenbuch on Wednesday downgraded Bank of America to a neutral rating from an "Outperform" rating, even though he raised his price target for the shares by a dollar to $12.00, saying that the stock's "current valuation appears to be ahead of the company's near to intermediate-term performance and appears to be discounting significantly faster improvements in efficiency than we would be expecting."

Orenbuch said that "At its current valuation, the shares appear to be discounting at least a 16% improvement in costs over the next year vs. our estimate of 10%," and that "despite the announced mortgage servicing sales, it will take until 2014 for the annual run-rate of expense saves. Separately, we think it will be hard for Bank of America to grow revenues faster than the 'average' bank."

Bank of America will report its fourth-quarter results on Jan. 17. The company announced on Monday that it expected its fourth-quarter earnings to be "modestly positive," as a result of its mortgage putback settlement with Fannie Mae ( FNMA) and because of its participation in an $8.5 billion mortgage foreclosure settlement with federal regulators.

The company on Monday also announced that Fannie Mae, Freddie Mac ( FMCC) and Ginnie Mae had agreed to allow it to sell servicing rights on 2 million residential mortgage loans, with an unpaid balance of $306 billion.

Orenbuch provided some optimism by saying that "if BAC is able to get an additional 5 percentage point improvement in the efficiency ratio, this would correspond to $0.30 in EPS, and over 200 bps in return on tangible equity," which would be "sufficient to have the shares be attractive at current levels."

"However, this represents about 40% of Legacy Assets & Servicing costs, which will likely take through 2015 to achieve that level of reduction," he said.

Orenbuch estimates that Bank of America will earn $1.08 a share in 2013, with EPS increasing to $1.40 in 2014.

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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