Bank of America Rises Over 2% Despite Fed Taper Talk

NEW YORK ( TheStreet) -- Bank of America ( BAC) led major U.S. banks higher on Wednesday, with shares rising over 2% to close at $14.62.

The broad indices all saw strong gains, with investors looking ahead to a Senate Banking Committee hearing Thursday, which will consider President Obama's nomination of current Federal Reserve Vice Chair Janet Yellen to succeed Ben Bernanke as the next chairperson of the central bank.

Yellen has been a very strong supporter of the Federal Reserve's "highly accommodative" stimulus policy, and her comments before the committee on Thursday are expected to underline that support. Then again, Republican committee members, including Sens. Richard Shelby (R., Ala.) and David Vitter (R., La.), can be expected to pose difficult questions for Yellen, as both have repeatedly expressed strong reservations for the Fed's ongoing attempts to stimulate faster economic growth.

Media reports continue to focus on "QE3," which includes monthly net purchases of $85 billion in long-term securities by the central bank, in an effort to hold down long-term interest rates. Federal Reserve Bank of Atlanta president Dennis Lockhart -- an alternate member of the Federal Open Market Committee -- in a speech on Tuesday, said that because of the partial shutdown of the federal government during the first half of October, "some of the data we follow are likely to be less reliable than usual through December at least."

The FOMC does not like to change policy without having concrete economic data. While Lockhart did say that the Fed's "mix of policy tools" may change, it would appear from his comments that the "tapering" of bond purchases -- feared by stock investors in the midst of a two-year bull market -- will not be announced following the next FOMC meeting on Dec. 11 to 12.

The KBW Bank Index ( I:BKX) on Wednesday rose nearly 1% to 65.71.

Bank of America

Shares of Bank of America have returned 26% this year, following a 110% return during 2012. The stock trades for 10.9 times the consensus 2014 earnings estimate of $1.34 a share, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $1.60. That expected 26% EPS growth -- fed in part by a major increase in expected share buybacks -- helps explain the stock's rather high forward price-to-earnings valuation when compared to peers among the "big four" U.S. banks:
  • Shares of JPMorgan Chase (JPM) closed at $54.16 Wednesday and traded for 9.0 times the consensus 2014 EPS estimate of $6.02. Despite booking a third-quarter net loss as it beefed up legal reserves in anticipation of major settlements of investigations of its mortgage activities by regulators and the Department of Justice, JPMorgan's return on average tangible common equity (ROTCE) for the 12-month period ended Sept. 30 was 12.59%, according to Thomson Reuters Bank Insight.
  • Citigroup (C) closed at $49.97 Wednesday and traded for 9.2 times the consensus 2014 EPS estimate of $5.43. The company's ROTCE for the 12-month period ended Sept. 30 was 7.42%.
  • Wells Fargo (WFC) closed at $42.68 Wednesday and traded for 10.6 times the consensus 2014 EPS estimate of $4.01. The company's 12-month ROTCE through September was 17.58%.

Bank of America's ROTCE for the 12-month period ended Sept. 30 was just 6.09%, the lowest among the big four, and the lowest among the 24 components of the KBW Banking Index. Investors are clearly placing a high value on the company's national branch network and continued recovery prospects as home prices continue to rise.

Bank of America CEO Brian Moynihan during a conference presentation on Tuesday said the bank was seeing momentum in its core businesses, with "some decent commercial loan growth," an improved credit card business, improved credit quality and success in selling 500 401-k plans to institutional customers during 2013.

CLSA analyst Mike Mayo in a detailed report later on Tuesday made it clear that he was among the disbelievers in Bank of America's current stock valuation.

Despite having a fantastic market presence that includes half of U.S. households, "strategic missteps have caused the company to fall short," according to Mayo. "Under the current CEO (since 1 January 2010), the share price has underperformed the BKX by 58%, the worst in our universe," Mayo wrote. He was factoring in the epic 58% drop for the shares during 2011, as the company muddled through the mortgage mess inherited in major part from Countrywide Financial, which it purchased in July 2008.

According to Mayo, "investors over the past two years may be more satisfied given better management stability (same two co-COOs), less highly visible mistakes, a stronger foundation (costs, credit, capital), very recent growth in credit cards, a stabilizing margin, approval by the Fed to repurchase shares and a stock price that has almost doubled."

But he continues to rate Bank of America a "sell," because the company "needs a more focused strategy." This includes clearly stating the priorities for each of the company's five business lines, "even if one sentence."

"Moreover, there should be related formal target metrics for outsiders to gauge management's ability to successfully implement these strategies (such as ROE and efficiency targets by business), and a link of these metrics to compensation," the analyst wrote.

May's price target for Bank of America is $12, implying 18% downside for the shares over the next 12 months.

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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.