Bank of America's Huge Whiff

4/22 - "The nation’s largest retail bank saw its net profit fall 77% and its earnings per share were $.23 -- a significant disappointment from consensus estimates of $.41 per share. Bank of America CEO Ken Lewis blamed $1.3 billion in trading losses and the need to increase reserves for potential charge-offs of bad loans...BofA does have some options when it comes to shoring up its balance sheet and--when compared to other investment banks--BofA’s overall risk exposure to the credit markets is fairly modest."

"Bank of America’s results do not greatly concern us as they are relatively unremarkable in comparison to the rest of this distressed sector and it seems curious that the market interpreted BofA’s news negatively. Recall, last week Citigroup announced another huge write down and cut 9000 more jobs and that stock rallied. It certainly appears that Bank of America is doing the right things in strengthening its balance sheet and holding cash in reserve to account for possible future write-downs.

We currently have a neutral rating on BAC stock. Given the market climate and Bank of America’s earnings, sales, and cash flow, we believe that BAC is fairly priced. Long term investors may want to take a look at BAC because of its relative financial strength."

4/21 - "“We can conclude that the financial services sector is ripe to receive capital,” wrote Keefe Bruyette & Woods analyst Melissa Roberts on Friday. That is an understatement. Large-cap banks and investment banks have accounted for nearly $33 billion of equity raisings this year, or 71% of the total capital raised by all U.S. companies this year, according to KBW."

"Roberts figures about 42 U.S. financial institutions may need capital infusions this year. The breakdown: 20 regional banks, four large-cap institutions including Bank of America, as well as Sovereign Bancorp. The list includes 11 real-estate investment trusts, two mortgage insurers, and Fannie Mae and Freddie Mac, who might each need $7 billion, according to KBW. Bank of America may need another $7 billion and Sovereign Bancorp anywhere between $500 million and $1 billion."

"Given the scale of the problem here, though, are the banks also too big to save? Roberts is actually pretty optimistic that private-equity firms, government investment funds and special purpose acquisition companies are going to cough up the cash. Private-equity firms alone have more than $800 billion of uninvested capital, SPACs have raised $13 billion they have yet to invest and government investment funds might have as much as $2.6 trillion under management...Of course, matching up the money with the banks that need it will, by nature, be an inefficient enterprise. For one thing, it is unlikely that every red cent of investors’ money will go toward troubled financial institutions."

4/21 - "Bank of America reported 1Q08 EPS that was below consensus (23 cents vs. 41 cents). While revenues and expenses were roughly inline, and capital markets charges came in better than expected ($2B vs. $3B), credit provisions were up 82% linked qtr (to $6B), reflecting higher charge-offs and reserve builds. We lowered our ests. anticipating higher credit costs going forward and maintain a downward bias. The stock reflects this earnings uncertainty and is trading below its long-term forward multiple (9x '09 EPS vs. 10x 5-yr. avg.). Maintain Hold."

"According to management, BofA expects higher charge-offs and possibly more reserve builds (though not as much as 1Q08), mitigated by continued growth in retail, cards, commercial, asset mgmt., and processing. More capital raising is possible, and the dividend would be reconsidered in a much weaker economy (2Q08 is critical for analyzing trends). We lowered our ’08 and ’09 ests. to $3.15 (down 25 cents) and $4.00 (down 20 cents), reflecting 1Q08 results and higher credit costs going forward."

"Our TP of $39 implies a P/E multiple of 9.7x our 2009 estimate...Company-specific risks include credit risk (consumer credit, commercial credit, and country risk; both positive and negative trends), market and interest-rate risks, which affect BofA’s businesses and portfolios in a variety of ways (upside and downside), and operational risks (incl. the LaSalle Bank integration and pending Countrywide deal)."