Bank of America: Buffett Bounce-Back Winner

NEW YORK ( TheStreet) -- Bank of America ( BAC) was winner among the largest U.S. banks on Thursday, with shares rising over 3% to close at $11.78.

Thursday's session was strong for banks in general, with the KBW Bank Index ( I:BKX) rising over 1% to close at 53.60, after Bloomberg reported that Warren Buffett was fully confident that the biggest U.S. banks had sufficiently boosted their financial strength. "The banks will not get this country in trouble, I guarantee it," he said.

Back in August 2011 when Buffett's Berkshire Hathaway ( BRK.B) purchased $5 billion in newly issued Bank of America preferred shares, with a fat coupon of 6%, Berkshire also was granted warrants to purchase up to 700 million Bank of America shares at a price of $7.14, for a ten-year period.

Bank of America's shares reversed course after declining by 6% over the previous three sessions.

Bank of America will have to pay a 5% premium when redeeming any of the preferred shares held by Berkshire Hathaway. Of course, the real gravy for Berkshire - on top of the healthy dividend yield on the preferred shares during a period of historically low interest rates - is that the value of the warrants has increased by $3.2 billion since they were granted on Aug 25, 2011. The warrants gained $245 million in value on Thursday alone.

Buffet said that Berkshire was in "no hurry" to exercise the options: "Nine years from now I would think that Bank of America as well as Wells Fargo ( WFC) and probably the other major banks will be worth considerably more money than they are now." Wells Fargo will kick off bank earnings season on Friday, before the market opens.

The Berkshire Hathaway CEO was also quoted as saying that "our banking system is in the best shape in recent memory."

Bank of America's estimated Basel III Tier 1 capital ratio was 8.97% as of Sept. 30, which was the highest among the "big four" U.S. banks, although the Federal Reserve won't fully phase-in the enhanced capital ratio requirements until 2019. Wells Fargo's estimated Basel III Tier 1 common equity ratio at the end of the third quarter was 8.02%, while Citigroup ( C) estimated that its Basel III Tier 1 common equity ratio was 8.6% and JPMorgan Chase ( JPM) estimated that its ratio was 8.4%.

It has been quite a busy week for Bank of America, with the company on Monday announcing 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.

Then on Wednesday, Credit Suisse analyst Moshe Orenbuch 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. The analyst said 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 added 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."

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

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

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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 TheStreet.com 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.