Bank of America: Rising from the Ashes

It’s been a banner year for Bank of America (NYSE: BAC). Here’s why you should consider this formerly scorned stock.

To be sure, it’s still the worst of the nation’s major banks, hip-deep in a quagmire of disastrous acquisitions and dud mortgages. Those problems remain serious drags, dictating a painful retrenchment that has sapped earnings.

But who gives a fig about any of that stuff, given that the stock has more than doubled in 2012, outgaining its closest pursuer in the Dow Jones Industrial Average by better than 2:1? Who cares, considering that Bank of America could easily gain another 50 percent or more in 2013 even if the economy continues to struggle?

A year ago, the home office in Charlotte was the gang that couldn’t shoot straight, an industry laughingstock that had to give Warren Buffett an especially sweet sweetheart deal to shore up capital.

Soon after Buffett’s investment came an ill-fated attempt to impose the $5 debit fee, which turned the bank into a target for Occupy Wall Street amid social media calls for a boycott. And shortly afterwards, Bank of America paid two ousted senior executives $11 million in golden parachutes. “This Is Why They Hate You and Want You to Die,” jeered Josh Brown, a prominent financial blogger.

Those were two of the early culls in an ongoing purge that has already slimmed the bank’s workforce by more than 16,000 in the last year and is expected to cut 30,000 jobs before it’s over.

The stock just kept going down. It bottomed in mid-December of 2011 at $4.99, as John Paulson’s hedge fund unloaded the remainder of its sinking stake.

But here we are a year later and the stock is above $11, and while Paulson is still licking his wounds, Bank of America has a new fan in Meredith Whitney, the one-time scourge of financial stocks.

How did oft-mocked chief executive Brian Moynihan pull off the comeback? By holding the world’s largest yard sale, with more than $60 billion in non-core assets liquidated in a score of transactions since Moynihan took charge three years ago.

Gone are the stakes in Blackrock (NYSE: BLK), Mastercard (NYSE: MA), HCA (NYSE: HCA) and China Construction Bank (Hong Kong: 0939). The overseas wealth management units of Merrill Lynch are going, going gone as well, with Julius Baer and Mitsubishi UFJ picking up those pieces. UK, Canadian, Spanish and Irish credit-card portfolios are history too, along with unwanted commercial real estate loans and mortgage servicing rights in the US. 

As a result, Bank of America is now better capitalized under the new Basel III global standard than rivals JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C). That in turn has raised hopes that Bank of America will seek to raise its symbolic penny-a-quarter dividend and to institute a share buyback in its stress test submission to the Federal Reserve on Jan. 7. The Fed’s verdict is due in March, and Bank of America’s reinforced capital tilts the odds against a second straight embarrassing rejection.

Now, Bank of America is highly unlikely to match Wells Fargo’s (NYSE: WFC) 2.6 percent annualized dividend yield, to say nothing of its rival’s $3.5 billion annualized share buyback. Bank of America had all of $4 billion in net income available to common shareholders over the last 12 months as of its last report, versus a whopping $17 billion (on lower sales) for Wells Fargo, according to data compiled by Capital IQ for Yahoo Finance.

But whatever trickle of dividends and buybacks the Fed does approve will be less valuable in its own right than as a new seal of approval from regulators. That should go some way toward narrowing the stock’s discount to peers in terms of book value.

Bank of America’s stock now trades at 57 percent of book and 80 percent of tangible book value. Well Fargo fetches 128 percent of book and 167 percent of tangible book, according to Thomson Reuters. JPMorgan is at 88 percent and 118 percent. Only Citi is comparably distrusted at 62 percent of book and 76 percent of tangible.

Achieving even JPMorgan’s unspectacular book value multiples could propel the stock above $17 before any asset appreciation.

Of course, one reason Bank of America book has been treated with an extra measure of suspicion is that private investors as well as Fannie Mae are still demanding that the bank buy back more than $25 billion in soured mortgages. And although the final cost is likely to be lower, it’s still an unknown that could take a bite out of Moynihan’s yard-sale proceeds.

And once all the bills for the housing bust have been paid it will be time to wonder whether the bank still remembers how to make real money, the sort its rivals have been cranking out for years.

Bank of America’s net interest margin, the spread between the interest it pays and interest it earns, is dead last among the too-big-to-fail bunch. At 2.31 percent it’s slightly below JPMorgan’s 2.43 percent, well shy of Citi’s 2.86 percent and eons from the Wells Fargo’s 3.66 percent.

The party line is that Bank of America is waiting for better times and juicier returns to deploy some of its hard-won capital. But that could just be the party line tailored to an industry that’s sitting on more deposits than it can prudently lend out.

The truth is that the current economic purgatory makes a big discount to book value seem a safer bet than even a knack for turning a steady profit. Like the country whose name it bears, Bank of America is trying to cut its way back to good health. Cutting and selling is hard—but, in this environment, not as hard as growing.      

Igor Greenwald is a financial columnist and has also worked as a newspaper editor, foreign correspondent and online producer. He was born in Ukraine, educated at Georgetown University and lives in Massachusetts.