Bank of America: Economic Winner

NEW YORK ( TheStreet) -- Bank of America ( BAC) was the winner among the largest U.S. banks on Friday, with shares rising 3.5% to close at $11.71, on signs the U.S. economy is improving.

The KBW Bank Index ( I:BKX) climbed 2% to close at 54.73, after the Bureau of Labor Statistics said non-farm payrolls in the U.S. grew by 157,000 during January, which was down from 196,000 in December. The unemployment rate edged up slightly to 7.9% from 7.8%.

Economists, on average, had expected 160,000 non-farm jobs to be added during January, with the unemployment remaining at 7.8%, according to Briefing.com.

A notable item in the Bureau of Labor Statistics report was the significant revisions of previous months' jobs-growth numbers. The number for November was revised to 247,000 from 161,000, while the December number was revised by 41,000 from 155,000. The office said the numbers were "revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors."

While there have been a number of notable disappointments so far this earnings season, FactSet said on Friday that "of the 234 companies that have reported earnings to date for the fourth quarter, 70% have reported earnings above estimates." That percentage has been pretty much the same for the past four quarters, however. FactSet also said that "in terms of revenues, 67% of companies have reported sales above estimates. This percentage is well above the average of 50% recorded over the past four quarters."

Bank of America


Bank of America's shares have had a flat return so far this year, trailing the KBW Bank Index's increase of 7%. But during 2012, Bank of America's stock returned 110%, while the index was up 30%. Bank of America's shares still haven't fully recovered from their epic drop of 58% during 2011. The shares are now down 11% since the end of 2010.

The stock trades for 0.9 times their reported Dec. 31 tangible book value of $13.36, and for 9.2 times the consensus 2014 earnings estimate of $1.28 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is 97 cents.

Bank of America was one of the "disappointments" this earnings season, reporting a fourth-quarter profit of just $700 million, or three cents a share. The company had pre-announced a large mortgage putback settlement with Fannie Mae ( FNMA) and a major contribution to the $8.5 billion foreclosure settlement between federal regulators and the nation's largest loan servicers.

Then again, Friday's action for the shares reflects how much is at stake for the company in an improving economy. Investors' mortgage repurchase claims against the company rose to $28.3 billion as of Dec. 31 from $25.5 billion the previous quarter. Bank of Americas fourth-quarter presentation implied that the Fannie Mae settlement would reduce the putback claims by roughly $12.2 billion, leaving about $16.1 billion in putback claims. That is still quite a sum, and every new report showing continued improvement in home prices makes investors more comfortable about the company's ability to absorb the punishment.

The company reported that its Basel III Tier 1 common equity ratio was 9.25% as of Dec. 31. The Basel III ratio was already significantly above the 8.5% that will be required in January 2019, when the Federal Reserve's enhanced capital requirements for systemically important financial institutions are fully phased in.

When discussing Bank of America's cost-cutting efforts, CEO Brian Moynihan said during the earnings conference call on Jan. 17 that "we have reduced our employee count in each quarter in the last five and we have done that while we continue to invest in our targeted growth areas," and that "we reduced our delinquent mortgage count, which allowed us to reduce our legacy asset servicing expenses," according to a transcript provided by Thomson Reuters.

Stifel Nicolaus analyst Christopher Mutascio rates Bank of America "buy," with a $13 price target, and said in a report on Jan. 18 that his positive take on the stock was unchanged, because of the company's modest net interest margin expansion and "solid growth" in several areas of fee income.

-- 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.

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