credit suisse bac cs-1
TRANSCRIPT
DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
09 January 2013
Americas/United States
Equity Research
Multinational Banks
Bank of America Corp. (BAC) DOWNGRADE RATING
Downgrading to Neutral from Outperform on
Valuation
■ We are downgrading shares of Bank of America to Neutral from
Outperform on valuation. Current valuation appears to be ahead of the
company’s near to intermediate-term performance and appears to be
discounting significantly faster improvements in efficiency than we would be
expecting. At its current valuation, the shares appear to be discounting at
least a 16% improvement in costs over the next year vs. our estimate of 10%.
Despite the announced mortgage servicing sales, it will take until 2014 for
the annual run-rate of expense saves. Separately, we think it will be hard for
Bank of America to grow revenues faster than the “average” bank.
■ Where could we be wrong? If BAC is able to get an additional 5
percentage point improvement in the efficiency ratio, this would correspond
to $0.30 in EPS, and over 200 bps in ROTE. This would be sufficient to
have the shares be attractive at current levels. However, this represents
about 40% of Legacy Assets & Servicing costs, which will likely take through
2015 to achieve that level of reduction.
■ Estimates. We are reducing our 2013/14 EPS estimates to $1.08/$1.40
(from $1.15/$1.55) primarily driven by lower revenue forecasts offset by
recalibration of expenses. Our 2015 EPS estimate stands at $1.55. Our price
target increases to $12 from $11 to reflect improved valuations for the bank
group, although our target reflects 0.8x forward TBV. Given an 8.2% ROTE
by 2013 and the DTA representing 18% of BV we think this warrants a
valuation at a discount to TBV.
Share price performance
6
8
10
12
Jan-12 Apr-12 Jul-12 Oct-12
Daily Jan 09, 2012 - Jan 08, 2013, 1/09/12 = US$6.27
Price Indexed S&P 500 INDEX
On 01/08/13 the S&P 500 INDEX closed at 1457.15
Quarterly EPS Q1 Q2 Q3 Q4 2011A 0.24 0.33 0.06 -0.07 2012E 0.16 0.14 0.28 0.23 2013E 0.29 0.23 0.23 0.33
Financial and valuation metrics
Year 12/11A 12/12E 12/13E 12/14E EPS (CS adj.) (US$) 0.54 0.80 1.08 1.40 Prev. EPS (US$) — 0.72 1.15 1.55 P/E (x) 22.1 15.0 11.0 8.6 Relative P/E (%) 148 106 86 74 Revenue 90,962.0 89,164.8 90,812.3 93,384.3 Preprovision Income (US$ m) 23,024 20,782 25,262 31,834 Book Value (US$) 20.05 20.42 21.54 22.94 Tangible book value (US$) 12.73 13.52 14.73 16.17 ROE (%) 2.68 4.05 5.53 6.71 ROA (%) 0.25 0.40 0.58 0.76
Book Value (Next Qtr., US$) 20.42 Tangible BV (Next Qtr., US$) 13.52 P/BV (x) (Next Qtr.) 0.59 P/TBV (x) (Next Qtr.) 0.89 Dividend (Next Qtr., US$) 0.04 Shares Outstanding (m) 10,778 Dividend yield (%) 0.33
Source: Company data, Credit Suisse estimates.
Rating (from Outperform) NEUTRAL* [V] Price (08 Jan 13, US$) 11.98 Target price (US$) (from 11.00) 12.00¹ 52-week price range 12.11 - 6.27 Market cap. (US$ m) 129,121.38 Enterprise value (US$ m) 129,121.38
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
[V] = Stock considered volatile (see Disclosure Appendix).
Research Analysts
Moshe Orenbuch
Jill Glaser, CFA
09 January 2013
Bank of America Corp. (BAC) 2
Overview We are downgrading shares of Bank of America to Neutral from Outperform,
primarily on valuation. Current valuation appears to be ahead of the company’s near to
intermediate-term performance and appears to be discounting significantly faster
improvements in efficiency than we would be expecting. Currently, Bank of America
shares are trading at 11 times 2013 earnings versus JPMorgan Chase and Citigroup
trading at closer to 8.5 times. At its current valuation, the shares appear to be discounting
about a 16% improvement in costs over the next year from current levels compared to our
estimate of 10%. Despite the announced mortgage servicing sales, it will take until 2014
to see the annual run-rate of expense saves. Separately, we think it will be hard for Bank
of America to grow revenues faster than the “average” bank.
Where could we be wrong? If BAC is able to get an additional 5 percentage point
improvement in the efficiency ratio, this would correspond to $0.30 in EPS, and over 200
bps to the return on tangible equity (ROTE). This would be sufficient to have the shares
be attractive at current levels. However, this likely represents about 40% of Legacy
Assets & Servicing costs, which will likely take through 2015 to achieve that level of
reduction. In the event that BAC shows considerably more traction with regards to
expenses, this could cause us to upwardly revise estimates and re-evaluate our price
target. Given our current view that the revenue environment will be challenged, the stock
more than doubled in 2012 and the shares trade at 11 times our 2013 EPS estimate, we
look for a more meaningful transformation to get more aggressive on the shares. Long-
term, we think earnings power may be in the $2 range; however, we think this could take
improvement in the macro growth, improved interest rate environment and cost
reduction/business realignment to get to that the level of earnings generation, which could
be 2015 or later.
The recent announcement of the settlement with Fannie Mae and the sale of MSRs
is a positive and should alleviate some expense pressure related to rep/warranty
expense; however servicing costs will likely not see the annual cost benefit until
2014. The settlement with Fannie Mae is an important step in putting legacy Countrywide
mortgage issues behind the company. This settlement results in a cash payment to FNM
of $3.6 billion and a repurchase of $6.75 billion of loans, but this will be covered by
existing repurchase reserves, as well a $2.5 billion addition to the repurchase reserve.
Separately, the sale of MSRs will result in $306 billion of servicing assets being transferred
out of the bank—a sizeable piece of BAC’s overall servicing assets (~20%). We think that
BAC could pursue additional sales of servicing assets given other interested buyers, and
would not rule out other sales to the current buyers after they have had time to digest the
current portfolio sales. We estimate that portfolio shrinkage and the sale of servicing
assets (including both performing and non-performing assets) could equate to $5 billion of
cost savings to Bank of America over time. We think that BAC will see the annual run-rate
benefit of the most recent servicing asset sales in 2014 given that the sales will occur in
stages in 2013. Given the nature of the non-performing servicing assets, we think that the
transfer of non-performing assets will come later in the transfer process, with the cost
benefit seen thereafter.
Revising EPS estimates lower. We are reducing our 2013 and 2014 EPS estimates to
$1.08 and $1.40 (from $1.15/$1.55), respectively, primarily driven by lower revenue
forecasts offset by recalibration of expense levels. Our earnings forecasts now include
more moderate estimates of revenue growth in 2013 (up 1% y/y) and up 3% y/y in 2014.
We are establishing a 2015 EPS estimate of $1.55. Additionally we revised our 4Q’12
EPS estimate to $0.23 per share on an operating basis and $0.02 per share on a reported
basis which reflects $0.21 per share one-time charges reported by Bank of America. Refer
to Exhibit 2.
09 January 2013
Bank of America Corp. (BAC) 3
We are increasing our 12-month price target to $12 from $11 previously. We expect
that Bank of America should be able to generate an 8.2% ROTE by 2013. We are
increasing our 12-month price target to $12 from $11 to reflect improved valuations for the
bank group, although our price target reflects 0.8 times forward TBV. We believe that the
level of returns, coupled with the fact that the DTA represents a high-teens (18%)
percentage of book value warrants a modest discount to tangible book value. We view a
potential risk of an additional 3-5% hit to book value from mortgage losses.
Revenue environment will be challenging
We are forecasting operating revenues of $90.8 billion in 2013 which represents a 2% y/y
increase. While we expect incremental fee income improvement (up 4% y/y on an
operating basis), we forecast that spread income will be under (down 1% y/y). Despite the
fact that Bank of America has some levers to pull in terms of high cost debt
extinguishment; we would expect modest pressure on the net interest margin. We are
forecast the NIM to decline 3bps y/y in 2013 with expectations of a relatively flat balance
sheet. We expect incremental improvement in fee income in 2013 relative to 2012 with
growth in service charges, investment banking income and trading. In general, we think it
will be hard for Bank of America to grow revenues faster than the “average” bank.
Given our view that 2013 will represent a revenue-challenged environment, we expect a
continued focus on the reduction of expenses to recalibrate the expense structure. While
we expect cost saves from the sale of servicing assets, the current valuation appears to be
ahead of the company’s near to intermediate-term performance and appears to be
discounting significantly faster improvements in efficiency than we would be expecting. At
its current valuation, the shares appear to be discounting a 16% improvement in costs
over the next year from current levels compared to our estimate of 10% decline. We
would note that Bank of America will likely be somewhat more revenue challenged than
other major banks as a result of the size of its market position and the competitive and
market forces at work.
Firm-wide cost saving program to provide some
relief given crisis-related costs are elevated/lumpy
Bank of America has announced its “New BAC” expense initiative which is expected to
yield $8 billion in total cost savings by mid-2015. The expense program is being
implemented in two phases. Phase 1 of New BAC includes $5 billion of annualized cost
savings in Bank of America’s consumer businesses (excluding Legacy Assets & Servicing)
by full implementation by year-end 2013. Phase 2 of New BAC is focused on $3 billion of
cost savings in the Corporate, Institutional and Wealth Management businesses with full
implementation in mid-2015. We estimate that $8 billion in cost saves could reduce the
current efficiency ratio by 900 bps. We are currently estimating about a $13 billion decline
in reported expenses by year-end 2015 to roughly $59 billion from an estimated $72 billion
reported expenses in 2012. This decline in reported expense levels includes the $8 billion
of cost saves related to the New BAC initiative, in addition to our estimate of $5 billion cost
saves in Legacy Assets & Servicing by year-end 2015 and incremental decline in litigation
expense.
Servicing costs will decline, but it will take time
Bank of America’s Legacy Assets & Servicing segment currently employs 41,700 full-time
employees and 17,0000 consultants. The unit accounts for 7.9 million with about 12% of
the loans in the portfolio 60+ days delinquent. Bank of America’s Legacy Assets &
Servicing segment generates about $3 billion of expenses per quarter for a run-rate of
close to $12 billion annually. Management estimates that current costs in this segment
are running about 6 times the level of more “normalized” costs to run this segment.
Specifically, management indicated a normalized run-rate of about $500 million quarterly.
Management is working on reducing the headcount in LAS with a reduction upon
09 January 2013
Bank of America Corp. (BAC) 4
completion of timely modification requirements as well as single point of contact which was
an element of the national mortgage settlement. The pace of headcount reductions is
expected to accelerate going forward.
The recent announcement of the sale of mortgage servicing rights is a positive; however
servicing costs will likely not see the annual cost save run-rate until 2014. The sale of
MSRs will transfer roughly $300 billion of servicing assets out of the bank—a sizeable
piece of BAC’s overall servicing assets (~20%). We think that BAC could pursue
additional sales of servicing assets given other interested buyers in the marketplace, and
would not rule out other sales to the current buyers after they have had time to digest the
current sales. We estimate that the transfer of these assets as well as declines in the
servicing portfolio (including both performing and non-performing assets) could equate to
about $5 billion of cost savings to Bank of America over time. We think that BAC will see
the annual run-rate benefit of the most recent servicing asset sales in 2014 given that the
sales will occur in stages in 2013. Additionally, given the nature of the non-performing
servicing assets, we think that the transfer of non-performing assets will come later,
delaying the benefit of the cost saves. Refer to Exhibit 1. There could be more sales of
servicing assets that would further reduce the level of costs.
Exhibit 1: Bank of America: Legacy Assets & Servicing Highlights: Loans, Delinquencies, Costs and Headcount $ in millions, unless otherwise stated
3Q'11 2Q'12 3Q'12
Sale of
MSRs
(Note 1)
Change in
4Q'12
(Note 2) Post-Sale
Total Number of Loans (in thous.) 9,979 8,435 7,893 (2,000) 5,893 Note 3
Total Number of Performing Loans (in thous.) 8,753 7,373 6,957 (1,768) 5,350
Total Number of 60+ day Delinq Loans (in thous.) 1,226 1,062 936 (232) (161) 543 Note 4
% 60+ day Delinquent 12% 13% 12% 12% 9%
Estimated Total Expenses $2,700 $2,700 $3,400
Estimated Litigation Expense $290 $151 $432 $250
Estimated Expenses, Excluding Litigation $2,500 $2,600 $3,000
FTE Employees (in thousands) 36.9 42.1 41.7
Contractors and Others (in thousands) 12.9 16.4 17.0
Quarterly Expense Estimates:
Estimated Expenses, Excluding Litigation $2,410 $2,549 $2,968 $2,216 Est. Annual
Estimated Litigation (Note 5) $290 $151 $432 $432 Reduction
Total Costs $2,700 $2,700 $3,400 $2,648 ($3,008)
Annualized Costs $10,800 $10,800 $13,600 $10,592
Estimated Processing Costs
60+ Day Delinquent Loans (Note 6) $935 $810 $714 ($177) ($123) $414
Performing Loans (Note 7) $109 $92 $87 ($22) $67
Estimated Processing Costs $1,044 $902 $801 ($199) ($123) $479
Estimated Quarterly Expense Runrate
Once Asset Transfers
Source: Company data, CS estimates. Note 1-Announced sale of mortgage servicing assets on 1/7/13. Note 2-Est. decline in 60+ day
delinquencies in 4Q’12, not including the sale of MSRs in the qtr. Note 3-Estimated remaining number of loans given sale of 2.0mm in 4Q’12.
Note 4-Est. number of 60+ day delinquent loans post sale based on 3Q’12 balances, MSR sale and BAC disclosure of a 161mm decline in
4Q’12. Note 5-Litigation expense disclosed by BAC for reported periods, estimated for post-sale run-rate at $250mm per qtr. Note 6-Est. costs
associated with 60+ day delinquent loans and estimated $3k per loan to service. Note 7-Est. costs associated with performing loans and
estimated $50 per loan to process. Note 9-Estimated quarterly expense run-rate once asset transfers are completed and costs are removed
following transfer (1-2 quarter estimated lag; expect to see annual cost benefit in 2014.
Management has indicated that the costs of servicing these assets are as much as $2
billion per quarter above “normal” and that the costs will decline proportionally with the
decline in delinquent assets in the LAS segment. Bank of America spends approximately
$3k per delinquent loans and closer to $50 per performing loan to process these loans.
09 January 2013
Bank of America Corp. (BAC) 5
We estimate that the decline in delinquent loans and sale of servicing portfolios could
reduce the cost structure in this business by about $5 billion by 2015. Refer to Exhibit 1.
Further cost reductions would likely require that BAC reduce the infrastructure that it has
built up in the servicing area--which will likely take several years.
While rep/warranty expense was episodic, the settlement should substantially
reduce further additions to the repurchase reserve
Given the purchases of both Countrywide and Merrill Lynch, Bank of America has been at
the epicenter of the mortgage crisis. The company has already taken charges, costs and
reserves of about $40 billion. Bank of America reached a settlement a year ago with
Freddie Mac as to the legacy representation and warranty issues for Countrywide’s
originations. At that time, Bank of America reached a deal with Fannie Mae although the
settlement was on outstanding claims at the time of the deal. On January 7, 2013, Bank of
America announced that it had reached a settlement with Fannie Mae to resolve agency
mortgage repurchase claims on loans originated and sold directly to Fannie Mae from
January 1, 2000 through December 31, 2009 sold by Bank of America and legacy
Countrywide. The agreement covers mortgage loans with $1.4 trillion of original unpaid
principal balance and $300 billion of outstandings. Unresolved claims by Fannie Mae
represented $11.2 billion of unpaid principal balance as of September 30, 2012. And the
agreements substantially resolve outstanding claims for compensatory fees. In total,
these actions will reduce Bank of America’s pretax income by approximately $2.7 billion in
4Q’12.
Bank of America will make a cash payment to Fannie Mae of $3.6 billion and also
repurchase $6.75 billion certain residential mortgage loans which BAC values at less than
purchase price. These actions are expected to be covered by existing reserves and an
additional $2.5 billion (pretax) in representation and warranty provision in 4Q’12. In
addition, Bank of America agreed to make a cash payment to FNM to settle outstanding
and future claims for compensatory fees arising out of past foreclosure delays. This
payment is expected to be covered by existing reserves and an additional provision of
$260 million (pretax) recorded in 4Q’12. Going forward, we think that rep/warranty
expense related GSE’s will be substantially reduced. We would expect that future
additions to the mortgage repurchase reserve related to the GSE’s would predominantly
be due to future mortgage originations (or any originations after 2009) which, in general,
should have substantially better credit quality and were underwritten with much stricter
standards—curtailing potential putback risk and loss to Bank of America.
Potential for additional costs related to private label mortgages
When Bank of America reached the settlement with Bank of New York Mellon, it accrued
at a comparable rate for the $418 billion of original balance that were in trusts that were
not part of the settlement. In the past, the company had indicated that there was range
possible loss of up to $6 billion. With the recent settlement with Fannie Mae, Bank of
America reduced its range of possible loss above existing accruals for both GSE and non-
GSE exposures of up to $4.0 billion at December 31, 2012. We estimate that existing
mortgage repurchase reserves of $16.3 billion as of September 30, 2012 includes $8.5
billion related to the pending Bank of New York Mellon settlement and roughly $5.5 billion
allocated to private label (reserved in 2Q’11), leaving an estimated repurchase reserve of
about $2.3 billion for GSE claims. With the $2.5 billion addition to the reserve in 4Q’12
related to the Fannie Mae settlement and an estimated $2.3 billion of allocated repurchase
reserves for the GSE claims, we estimate total loss at roughly $5 billion related to the cash
payment to Fannie and the repurchase of loans (not including compensatory fees of $1.3
billion).
Bank of America reduced its potential range of loss estimate to $4.0 billion. Assuming the
$5.5 billion allocated in 2Q’11 and range of loss of up to $4.0 billion, this would put
“potential” losses from private label parties and monolines of up to about $9 billion. We
would estimate that this loss estimate on remaining private label originations (while high
09 January 2013
Bank of America Corp. (BAC) 6
and not probable) likely encompasses potential loss (based on the existing BK settlement
and assuming that the current settlement proceeds as currently outlined). In addition, we
would note that there are likely litigation reserves set aside for exposure to monolines and
securities litigation.
Potential for additional legal costs
Another driver of elevated expenses has been litigation expense. Bank of America
incurred estimated litigation expense of $3.4 billion for the nine-months ended September
30, 2012. This comes on top of an estimated $6.2 billion in litigation expense in 2011 and
$2.6 billion in 2010. Over the last 3-4 years, we estimate Bank of America incurred about
$13 billion in litigation and legal-related costs. In the near to intermediate-term these costs
are likely to remain high (and at times could even increase based upon the progress in
specific lawsuits). We are currently estimating total litigation expense of $2-3 billion for
2013 compared to $4 billion estimated for 2012. Over the longer term, these costs will
likely moderate to less than $1 billion per year, though this may take several years.
4Q’12 One-Time Charges
Despite 4Q’12 charges, Bank of America expects to report modestly positive 4Q’12
earnings per share. With about $0.21 per share in charges in 4Q, this comes in slightly
better than our EPS estimate of $0.15 and the Street at $0.19 per share. Refer to Exhibit
2 for 4Q’12 charges that Bank of America outlined. In addition to charges related to the
FNM settlement and MSR sale, BAC expects to record a $2.5 billion charge partly related
to the foreclosure review, in addition to a negative DVA and FVO charge of $700 million
and a tax benefit of $1.3 billion.
Exhibit 2: Bank of America: Estimated 4Q’12 Charges in millions, unless otherwise stated
Pre-Tax After-Tax
Est. Per
Share Impact
Representation and warranty expense for FNM -$2,450 -$1,544 ($0.14)
Additional provision for FNM outstanding claims -$260 -$164 ($0.02)
Gain on MSR above book value $325 $205 $0.02
Ind foreclosure review, litigation (mtg-related) -$2,500 -$1,575 ($0.15)
Negative DVA and FVO -$700 -$441 ($0.04)
Tax benefit from recognition of foreign tax credits $1,300 $0.12
Estimated EPS Impact ($0.21)
Source: Company data, Credit Suisse estimates
Charge Relate to Independent Foreclosure Review
Ten mortgage servicing companies reached an $8.5 billion settlement with regulators
including the OCC and Federal Reserve related to deficient foreclosure practices. The
total settlement includes $3.3 billion in direct payments to eligible borrowers and provides
$5.2 billion in other assistance, such as loan modifications and forgiveness of deficiency
judgments. Bank of America announced that it expects to record a 4Q’12 charge of $2.5
billion related to the foreclosure review, with a portion of that charge likely due to the IFR,
which we estimate that the 4Q’12 charge could total $1.2 billion assuming that the $1.9
billion related to other assistance (including loan modifications and forgiveness) is already
accrued for in the existing loan loss reserve balance.
09 January 2013
Bank of America Corp. (BAC) 7
Exhibit 3: Estimated Foreclosure Settlement by Bank with Federal Reserve and OCC (Notes 1-8) US$ in millions, unless otherwise stated
Institution
Relief to
Borrowers
(Note 2)
Other Assistance
including mods
(Note 3)
Est. EPS
Impact
(Note 7)
Settlement with Servicers (Note 3):
Bank of America Corp. BAC $3,148 $1,222 $1,926 $0.07 Note 4
Wells Fargo & Co. WFC $1,857 $721 $1,136 $0.09
JPMorgan Chase & Co. JPM $1,754 $681 $1,073 $0.12
Citigroup, Inc. C $805 $305 $500 $0.07 Note 5
PNC Financial PNC $173 $67 $106 $0.08
U.S. Bancorp USB $208 $80 $128 $0.03 Note 6
Total for Ten Servicers $8,500 $3,300 $5,200 8%
Foreclosure Settlement DetailsEstimated
Total
Settlement
(Note 1)
Source: Company data, CS estimates. Note 1- Credit Suisse estimate of total settlement amount based on total delinquencies on the servicing
portfolio. Note 2-Estiamted relief to borrowers based on total $3.3bn or 39% of the total $8.5 billion settlement. Note 3-Estimated assistance
including modifications and forgiveness. Note 4-Bank of America noted in a press release that it plans to record a charge of $2.5Bn in 4Q’12
related independent foreclosure review, litigation (primarily mortgage-related) and other mortgage related matters. Note 5-Citi expects to report
a $305mm charge in 4Q’12 and has $500mm to assist borrowers. Note 6-USB announced that its portion of the settlement is a cash payment of
$80 million and $128mm for mortgage assistance which is already accrued for in the loan loss reserve. Note 8 – Estimated EPS impact based
on total settlement amount and a tax rate of 35% and 3Q’12 avg share count.
Forecast incremental improvement in ROTE and
book values
We expect 5% growth in book value and 9% growth in tangible book value in 2013.
Currently we are forecasting 2013 year-end book value of $21.54 and tangible book value
of $14.73. We are currently forecasting that Bank of America will generate an 8.2% ROTE
in 2013 and 9.7% in 2014 which assumes 36% operating EPS growth in 2013 and 29% in
2014. Our assumptions also include 9% payout (including dividends and share buyback)
in 2013 and 20% in 2014 as we think that the company and regulators will have a more
cautious view towards capital return given mortgage issues that could take years to
resolve. We believe that the level of returns, coupled with the fact that the DTA represents
a high-teens (18%) percentage of book value warrants a modest discount to tangible book
value. In addition, there is risk of an additional 3-5% hit to book value from mortgage
losses. Our price target of $12 equates to 0.6 times forward book value and 0.8 times
forward tangible book value.
09 January 2013
Bank of America Corp. (BAC) 8
Exhibit 4: Bank of America Book Value Growth Exhibit 5: Bank of America Tangible Book Value Growth
$19
$20
$21
$221Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12E
1Q
13E
2Q
13E
3Q
13E
4Q
13E
Book Value per Share
$10
$11
$12
$13
$14
$15
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
E
1Q
13
E
2Q
13
E
3Q
13
E
4Q
13
E
Tangible Book Value per Share
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
However, a meaningful piece of book value is represented by the DTA
The regulatory capital rules under Basel III are especially punitive to deferred tax assets
(DTA) whereby a large portion of Bank of America’s DTA’s are excluded from capital. At
the peak, Bank of America’s deferred tax assets represented 41% of its book value,
although DTA’s now represent 20% of book value (which is above average for the large
cap banks). Refer to Exhibit 6. Bank of America’s net deferred tax asset stands at $28.5
billion as of September 30, 2012. The reduction was the result of the fact Bank of America
has already reduced its loan loss reserves by about $20 billion, the realization of the
remainder will likely be driven by domestic profitability. However, we would note that any
additional mortgage-related charges (or other one-time charges) would delay the ability of
the company to convert this asset to cash. Separately, if the corporate tax rate were to
change, it could result in a ~3% hit to tangible book value of the corporate tax rate moved
to 30%.
Exhibit 6: Bank of America: Net Deferred Tax Asset ($) and Relative to Tangible Book Value (%) in billions, unless otherwise stated
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
$0
$5
$10
$15
$20
$25
$30
$35
200
8Q
3
200
8Q
4
200
9Q
1
200
9Q
2
200
9Q
3
200
9Q
4
201
0Q
1
201
0Q
2
201
0Q
3
201
0Q
4
201
1Q
1
201
1Q
2
201
1Q
3
201
1Q
4
201
2Q
1
201
2Q
2
201
2Q
3
Net Deferred Tax Asset ($bn)
% of Tangible Book Value
Source: SNL Interactive, company data, Credit Suisse estimates.
09 January 2013
Bank of America Corp. (BAC) 9
Potential risk to book value
We view a potential risk of an additional 3-5% hit to book value from mortgage losses.
Bank of America reduced its range of possible loss above existing accruals for both GSE
and non-GSE exposures of up to $4.0 billion at December 31, 2012 over existing accruals
compared to $6.0 billion at September 30, 2012. We estimate that mortgage repurchase
reserves could stand at about $5 billion (not including the $8.5 billion allocated to the Bank
of New York Mellon settlement). Assuming reserves in addition to a range of loss estimate
of $4.0 billion, this would put “potential” losses from private label parties and monolines of
up to $9 billion. Assuming the potential loss range of $4 billion was recognized, this would
equate to a 3% hit to tangible book value. Incremental losses could result from the
obligations as the underwriter of mortgage securities.
Capital return expected to be modest
Bank of America has done a good job at managing capital levels, particularly in advance of
the Basel III rules. Basel III Tier 1 common equity ratio has improved meaningfully
standing at an estimated 8.97% as of September 30, 2012 and above the expected fully
phased-in minimum of 8.5%. Despite improved capital positioning, we would regulators to
scrutinize the volatility of earnings. Given mortgage issues at the company, we would
expect management to remain measured in its request for capital return in 2013. We
would expect a preference towards share buyback versus dividends given the earnings
profile, I addition to the current share price below tangible book value. We are factoring in
a modest share buyback of $500 million over the four quarters beginning in 2Q’13. We
estimate that the company could also increase the dividend to $0.02 per share from $0.01
per share currently which would equates to a modest dividend payout ratio of 6% in 2013.
Overall we are forecasting modest capital return of 9% of earnings.
09 January 2013
Bank of America Corp. (BAC) 10
Companies Mentioned (Price as of 08-Jan-2013)
Bank of America Corp. (BAC.N, $11.98, NEUTRAL[V], TP $12.0) Citigroup Inc. (C.N, $42.46) JPMorgan Chase & Co. (JPM.N, $45.5) PNC Financial Services Group (PNC.N, $60.25) U.S. Bancorp (USB.N, $32.97) Wells Fargo & Company (WFC.N, $34.71)
Disclosure Appendix
Important Global Disclosures
I, Moshe Orenbuch, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Price and Rating History for Bank of America Corp. (BAC.N)
BAC.N Closing Price Target Price
Date (US$) (US$) Rating
16-Apr-10 18.41 23.00 O
16-Jul-10 13.98 20.00
15-Apr-11 12.82 18.00
29-Jun-11 11.14 17.00
17-Aug-11 7.46 14.00
03-Oct-11 5.53 13.00
19-Dec-11 4.99 11.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment oppor tunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Austr alia, New Zealand are, and prior to 2nd October 2012 U.S. and Canad ian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attra ctiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
09 January 2013
Bank of America Corp. (BAC) 11
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 42% (53% banking clients)
Neutral/Hold* 39% (47% banking clients)
Underperform/Sell* 16% (43% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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Price Target: (12 months) for Bank of America Corp. (BAC.N)
Method: Our $12 target price for BAC is 0.8 times forward tangible book value (TBV) estimate. This multiple represents a discount to large cap peers and represents a discount to BAC's 10-year median TBV multiple of close to 3.0x owing to fundamental headwinds, as well as company-specific issues/risks. Further our $12 target reflects 11 times 2013E earnings.
Risk: Risks to BAC's achievement of our $12 target price are tied to the pace and duration of the economic and housing recovery and change in credit quality metrics. Risk surround the potential for credit quality costs that are higher than we are currently anticipating, in both consumer and commercial portfolios. Other risks surround deals including Countrywide Financial and Merrill Lynch, and contingent liabilities regarding these transactions, including mortgage putbacks. Capital markets results can be volatile. Additionally, uncertainty remains around capital standards and implementation of Basel proposals. We believe financial regulatory reform will have a negative impact on the banking industry and projected profitability of Bank of America, although final rules will be determined over the coming years.
Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (BAC.N, C.N, JPM.N, USB.N, WFC.N, PNC.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (BAC.N, C.N, JPM.N, USB.N, WFC.N, PNC.N) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (BAC.N, C.N, JPM.N, USB.N, WFC.N, PNC.N) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (BAC.N, C.N, JPM.N, WFC.N, PNC.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (BAC.N, C.N, JPM.N, USB.N, WFC.N, PNC.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BAC.N, C.N, JPM.N, USB.N, WFC.N, PNC.N) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (BAC.N, C.N, JPM.N, USB.N, WFC.N, PNC.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (BAC.N, C.N, JPM.N, USB.N, WFC.N, PNC.N).
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
09 January 2013
Bank of America Corp. (BAC) 12
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BAC.N, C.N, JPM.N, USB.N, WFC.N, PNC.N) within the past 12 months
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09 January 2013
Bank of America Corp. (BAC) 13
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BAC_Downgrade to Neutral_010913.doc