BofA’s Good For $10, Non-U.S. Wealth Unit Attracts Several Bids

Bank of America’s (NYSE:BAC) non-U.S. wealth management business is coming under the hammer, and reports indicate that the Royal Bank of Canada (NYSE:RY) and Credit Suisse (NYSE:CS) are among those interesting in bidding. ^[1] Besides these two banks, Swiss banking giant Julius Baer has also expressed an interest in the business. Bank of America expects to raise around $2 billion from this deal, which it is looking to wind up this year.

We maintain a $10 price estimate for Bank of America’s stock – a figure significantly above its current market price. The overwhelming pessimism among investors toward banking stocks in the wake of a possible Greek euro-exit is largely responsible for this price parity.

See our full analysis for Bank of America’s stock here

Bank of America is undergoing sweeping organizational changes that are part of the Project New BAC, which seeks to streamline the business model of the country’s second-largest bank. Besides the implementation of huge cost-cutting measures, the changes include plans to sell off non-core and strategically redundant business units.

The decision to dispose of the non-U.S. wealth management business stems from this focus on cutting flab. This business manages just about $90 billion of around $2.1 trillion in client assets managed by the company’s wealth management unit as a whole – which shows the size of the bank’s wealth management business in the U.S. The sale targets Bank of America’s wealth management units in Europe, the Middle East, Latin America and Asia. ^[1]

The bank started off with the expectation of pocketing anything up to $3 billion from the deal. But initial bids indicate that the final valuation may be between $1.5 billion and $2 billion. This is in-line with the $1.8 billion we estimate the business to be worth based on our analysis of Bank of America.

We arrived at this figure by first reducing our forecast for the bank’s wealth management assets portfolio size by $90 billion to capture the impact of the sale. Then, as the units include the bank’s wealth management business in the promising and more profitable developing countries, we reduced the annual growth rate of client balances from the current 4% to 3%, and the fees as a percentage of these assets by 0.2 percentage points.

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1. RBC, Credit Suisse among bidders for BofA wealth units: sources, Reuters, May 17 2012 [↩] [↩]