Thursday, January 07, 2010

Bank of America (NYSE:BAC): Upgraded to Outperform at CSFB; Added to Focus List

Credit Suisse is making a major call this morning upgrading Bank of America (NYSE:BAC) to Outperform from Neutral with a $21 price target (prev. $17) and is adding the stock to their Focus List.

Firm notes they are recommending Bank of America, as the current risk/reward on the shares is attractive at current levels. BAC is the cheapest of their large cap banks on “normal” earnings trading at about 6.1 times (vs. large cap peers at 7.6x) and will build book value rapidly during 2010. Based on a pre-tax pre-provision earnings estimate of approx. $65 billion and net income of $27 billion, CSFB's normalized EPS estimate stands at $2.65. Furthermore, they look for book value growth in 2010 which marks an inflection point from a 23% decline in book value in 2009. are currently forecasting 7% growth in book value and 15% growth in tangible book value in 2010. Firm expects Bank of America to earn $0.90 per share in 2010, realize a mark-to-market gain in 3Q’10 related to CCB shares, as well as generate approx. $3.0bn in capital due to asset sales (CSFB incorporated into 3Q’10 estimates) which will support book value growth in 2010. Firm's revised price target of $21 (from $17) equates to 1.5 times est. forward tangible book value and 7.9 times normalized earnings

The repayment of the entire $45 billion of TARP preferred relieves a significant overhang on the shares, particularly given the intense regulatory and political scrutiny surrounding the company and its receipt of government money. Bank of America was one of only a few banks categorized as receiving “extraordinary assistance” from the government, which likely pressured the company to take more proactive actions to exit the program. The nearterm financial implications of the capital raise and repayment are favorable including both near-term EPS and tangible book value accretion. While the capital raise is about 10% dilutive to CSFB's normalized earnings per share estimate ($2.65), the capital raise is about 3% accretive to tangible book value. With a fairly significant capital raise behind the company and bolstered capital levels (pro forma Tier 1 common equity ratio of 8.5% vs. large cap peer median of 7.5%), they expect shares to outperform over the next 12 months.

Furthermore, CSFB notes they are encouraged by the slowing growth in non-accruals at Bank of America. The deceleration in problem asset growth began in 1Q’09. While part of the slowdown is attributable to the higher base of problem assets, there is a discernable slowdown taking place (up at 10% pace vs. peak q/q growth of 66% in 4Q’08). We would expect the slowdown to continue into 2010, and they are currently projecting that problem asset growth will turn negative in 2Q’10.

Firm recognizes that a primary risk to their thesis is that credit quality deterioration is worse than they are currently anticipating and consequently it takes longer for the company to achieve their “normalized” earnings estimate. Separately, another risk lies in the company’s successful integration of Merrill Lynch.

Earnings Estimates
Bank of America’s recently announced capital actions are accretive to near-term EPS. Factoring in both the capital raise and TARP repayment, they are raising their 2010 EPS estimate to $0.90 from $0.80 previously. The elimination of the $3.6 billion in annual preferred costs provides a significant near-term EPS lift, given depressed earnings levels.

CSFB is currently forecasting 7% growth in book value and 15% growth in tangible book value in 2010. This will mark an inflection point following a year in which book value per share declined 23%. While the next two quarters are likely to result in book value pressure (TARP repayment in 4Q’09 and FAS 166/167 implementation in 1Q’10), they look for improved growth in 2H’10. Firm expects Bank of America to earn $0.90 per share in 2010, generate a mark-to-market gain in 2H’10 related to CCB shares, as well as realize $3.0bn in capital due to asset sales (they incorporated into 3Q’10 estimates) which all serve to support book value growth in 2010.

Notablecalls: I think this is exactly what the stock needed to get to $17 in the very n-t. CSFB Focus List is something that I have grown to like & respect over time as The Credit Suisse Investment Policy Committee's recommendations have outperformed the market quite nicely over the past years.

I would compare the current BAC upgrade to the Morgan Stanley (MS) upgrade(s) we got couple of days ago. These show the analysts are getting comfortable with the names again which in turn means more money will pour in. This serves to push the stocks higher.

All in all, a good one. I expect it to trade $16.75+ today and closer to $17 if the market plays ball today.

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