Unresolved mortgage repurchase demands against Bank of America totaled $16.648 billion as of June 30, down from $17.135 billion the previous quarter, mainly reflecting a settlement with bond insurer MBIA ( MBI). Even though $16.648 billion is a very large figure, the company "estimates that the range of possible loss for representations and warranties exposures could be up to $4 billion over accruals at June 30, 2013," according to its second-quarter 10-Q filing.

"We do not currently have an EPS estimate beyond or 2014 estimate of $1.38," Mutascio wrote. "However, if we were to assume annual operating expenses were to fall to $57.0-$58.5 billion from our 2014 estimate of $61.4 billion (assumes the potential for some natural expense creep), then the LAS savings would represent a $0.17-$0.25 EPS benefit."

"The timing of the full EPS impact would seem to be a 2016 event since Legacy Asset Servicing costs are not expected to normalize at $500 million per quarter until 4Q15," Mutascio added.

Looking beyond the LAS cost savings, based on Thompson's comments, "one could build the company's annual net interest income from $41.6 billion in 2Q13 to approximately $45.8 billion with the benefit of higher long-term rates ($1.0 billion with a 100 bps increase), a parallel shift in the curve ($2.3 billion with a 100 bps parallel shift) and the repayment of long term debt ($875 million if $35 billion in debt matures net of issuances)," according to Mutascio. He added "this does not take into account any balance sheet growth."

Valuation and Expected Returns

Mutascio rates Bank of America "market perform," with a price target of $15.00.

Bank of America's shares closed at $14.57 Friday and traded for 10.6 times the consensus 2014 earnings estimate of $1.38. Among the "big four" U.S. banks, only Wells Fargo trades at a similar valuation, with shares closing Friday at $42.76, or 10.6 times the consensus 2014 EPS estimate of $4.02. Citigroup's shares closed Friday at $49.83 Friday and traded for 8.9 times the consensus 2014 EPS estimate of $5.57. JPMorgan was cheapest among the group, with shares closing Friday at $52.32, or 8.6 times the consensus 2014 EPS estimate of $6.11.

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