Bank of America Scrambling to Ease Investor Concerns

Bank of America (NYSE:BAC) has taken some notable actions over the last few weeks – all of them clearly aimed at addressing the growing concerns among its investors regarding the bank’s capital adequacy. The $5 billion deal with Warren Buffett-led Berkshire Hathaway provided the bank with a much needed vote of confidence late last week. (See Bank of America Strikes Deal for Buffett’s Endorsement). The bank is building on the momentum from the deal by announcing its decision to sell half its stake in China Construction Bank and also to sell or wind down the correspondent mortgage lending division. ^{[1] [2]} Bank of America competes with other major banking groups including JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Deutsche Bank (NYSE:DB), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC).

We maintain our price estimate for Bank of America’s stock at $10.90 and believe that the market, which was over-reacting due to the building negative sentiment since the bank’s Q2 2011 results, will correct the stock’s price with time.

Decision to sell-off direct result of investor concerns

Over the past 2 months, investors have voiced their concerns regarding the sustainability of Bank of America’s mortgage business which continues to face legal actions due to its legacy portfolio. These concerns also raised substantial doubts regarding the quality of the bank’s assets with rumors spreading about the bank having to raise a substantial amount of capital to maintain mandatory core capital ratios.

The bank’s decision to sell 13.1 billion shares of China Construction Bank Corporation (CCB) looks like a move to demonstrate the bank’s ability to raise cash quickly if the situation so demands. And the approximately $8.3 billion in cash proceeds from this sale – implying an after-tax gain on sale of almost $3.3 billion – should quell concerns about the bank’s capital adequacy at least for the time being.

On the other hand, the bank’s decision to exit the correspondent mortgage lending division – which bought loans originated by third-party correspondents – evidently aims to stem mortgage-related losses and re-instill investor faith in the bank’s mortgage business. Bank of America has been cutting down on its Home Loans business with the recent decision to exit the wholesale lending and reverse mortgage businesses as well as the decision to sell Balboa Insurance.

These moves have struck the right cord with investors as the stock price rose above $8 for the first time since the beating the shares took after the U.S. debt rating downgrade and the AIG lawsuit early this month.

See our full analysis for Bank of America

1. Bank of America Agrees to Sell 13.1 Billion Shares of China Construction Bank, Bank of America Press Releases, Aug 29 2011 [↩]
2. Bank of America Issues Statement in Response to Media Reports on Mortgage Business, Bank of America Press Releases, Aug 31 2011 [↩]