BoA’s Mortgage Woes, Trading Business to Stink up Q3 Results
Bank of America’s (NYSE:BAC) stock has taken a beating in recent weeks amid mortgage-related lawsuits, the debt crisis impacting European countries and the recent announcement by Greece that it will miss its deficit target for the year. While sentiment has improved in the last couple of days as Geithner’s testimony last week that US banks like Citigroup (NYSE:C), JPMorgan (NYSE:JPM), and Morgan Stanley (NYSE:MS) can weather a downturn added some positive support for financials in general and plans to save the euro zone banks are starting to take shape, we still expect the environment to remain volatile and believe that Bank of America’s operating margin for sales and trading will take a hit in the coming quarters. This will weigh on earnings results due out next week.
See our complete analysis for Bank of America’s stock.
[trefis_forecast ticker=”BAC” driver=”0588″ cadate=”2011-09-22″ caweekly=”1″ comp=”community”]
BAC’s Mortgage-Related Woes Continue
Two months back AIG filed a $10 billion lawsuit against Bank of America (BAC) alleging that BAC and its acquired businesses, Countrywide and Merrill Lynch, were responsible for a “massive fraud” in mortgage-backed securities. And more recently Sealink Funding has sued BAC’s Countrywide unit for $1.6 billion worth of mortgage-related securities that it purchased from BAC between 2005 and 2007. While BAC has defended itself by blaming the downturn in economy for the losses suffered, the company may need to make further write downs and this will be one area of concern in the upcoming earnings announcements.
Sentiment Rally from Geithner & EU Plans
Treasury Secretary Timothy Geithner recently announced that the leading U.S. banks have minimal direct exposure to the riskiest European countries such as Greece, Italy, Portugal, Spain and Ireland – relieving some investor concern. We explained in a previous note that Bank of America and other U.S. banks have low exposure to these economies compared to major European banks like Deutsche Bank, RBS and Barclays. (Read Geithner’s Confidence in US Banks Sparks Rally for Financials)
Moreover, during the weekend EU leaders say they are nearing a deal on how to handle struggling euro zone banks that have sapped confidence in the EU leadership’s handling of this debt crisis. France and Belgium also stepped in to nationalize Dexia, and these latest moves have helped to shore up confidence in the EU leaders’ willingness to find a solution.
Q3 Results Will Likely Show Weak Trading Environment
However, the legacy mortgage portfolio will continue to hound Bank of America.
Last quarter it made a $8.5 billion settlement with 22 institutions and set aside an additional $12 billion for other mortgage-related charges. The weak macro-economic environment will continue to keep markets volatile and continue to impact Bank of America’s sales and trading business, which accounts for around 22% of its stock price by our analysis.
While we estimate Bank of America’s sales and trading operating margin will decrease from 49% in 2012 to to 45% by the end of our forecast period, Trefis members expect a much steeper decrease from 44% to 26% during the same period. The member estimates imply a downside of nearly 10% to the Trefis price estimate for Bank of America’s stock.
We currently have a Trefis price estimate of $10.80 for Bank of America’s stock, about 75% above the current market price of $6.20.
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