Bank of America: Financial Winner

NEW YORK ( TheStreet) -- Bank of America ( BAC) was the winner among the nation's largest banks on Tuesday, with shares rising 4% to close at $12.29.

The broad indexes ended mixed, as investors looked ahead to President Obama's annual State of the Union Address, scheduled for Tuesday at 9:00 p.m., Eastern time.

The KBW Bank Index ( I:BKX) was up over 1% to close at 55.70, with all but five of the 24 index components seeing gains for the session. The index has risen 9% year-to-date, following a 30% return during 2012.

Early on Tuesday, Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett said in his firm's Global Fund Management Survey that "many measures of market sentiment... are warning that risk assets are now vulnerable to bad news after a 7-month rally." When discussing fund managers' views on bank stocks, Hartnett said that 24% of U.S. fund managers were "overweight" on bank stocks, which was the highest level on record.

Bank of America

Bank of America's shares have returned 6% year-to-date, following a whopping return of 110% during 2012. That was by far the best return among the components of the KBW Bank index, however, it was only a partial recovery from a 58% decline during 2011. Putting it all together, Bank of America's shares are still down 7% since the end of 2010.

The shares trade for 9.5 times the consensus 2014 earnings estimate of $1.29 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $0.99.

Bank of America still trades at a discount to tangible book value, with only Citigroup and Morgan Stanley ( MS) sharing that distinction among the largest U.S. bank holding companies.

The company's reported Dec. 31 tangible book value was $13.36 a share. Guggenheim Securities analyst Marty Mosby said in a report on Jan. 18 that the discount to book value represented "the market's expectation for future losses from outstanding mortgage-related overhang issues."

Mosby on Feb. 5 raised his price target for the shares to $15.00 from $14.00. The analyst estimates the company will earn $1.15 a share this year, with earnings growing to $1.25 a share in 2014.

Bank of America's rocky road over the past few years has centered on mortgage loan repurchase demands from investors, for mortgage-backed securities issued before 2008. The company said on Jan. 18 that mortgage putback claims totaled $28.3 billion as of Dec. 31, however, the bank's settlement with Fannie Mae in early January lowered the repurchase claims by about $12.2 billion.

The next major event for Bank of America investors is likely to be the Federal Reserve's completion of its annual stress tests for the nation's largest banks on March 14. With Bank of America reporting a Dec. 31 Basel III Tier 1 common equity ratio of 9.25%, the company has exceeded the capital requirement under the Federal Reserve's proposed capital rules, that won't be completely phased-in until January 2019. That's why Mosby estimates the company will receive approval to raise its quarterly dividend to $0.05 a share from the current nominal payout of $0.01.

Mosby on Feb. 5 was careful to say in his report that his dividend estimates were "based on the assumption that we believe it is in management's best interest to use all of their excess capital to increase their dividends instead of repurchasing shares," so investors could see the bank choose a smaller dividend increase, along with some share buybacks.

Oppenheimer analyst Chris Kotowski on Feb. 4 said that he would "counsel investors to have guarded expectations, particularly as it relates to BAC, Citigroup ( C) and CIT Group ( CIT) ," for a return of capital to investors. "While all three companies have high and rising capital ratios, the industry's recent history suggests that the banks get let out of the penalty box only very slowly," he wrote.

Following the completion of the stress tests, Kotowski expects Bank of America to be approved to raise its quarterly dividend to $0.03, with Citigroup raising its quarterly dividend to $0.10 from $0.01, and CIT Group initiating a quarterly dividend of $0.31.

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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 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.