Is It Time To Cash In On Bank Of America?

Bank of America (BAC) is the second largest bank in terms of deposits in the United States. The bank’s headquarters are in Charlotte, North Carolina and it has approximately 57 million customers and 5,900 banking centers. The bank has a market cap of $78.78 billion and the stock price is around $7.31. The dividend is $0.04 per share.

Bank of America stock price has gained 65% since its December 19, 2011 low of $4.92. Over the last two years, the bank’s stock price has decreased by 47%. The primary reason that Bank of America’s stock price decreased was because of large loan loss write-offs. The purchase of Countrywide turned out to be one of the worst deals ever. After reporting net income of $15 billion with bad debt losses of $8.3 billion in 2007, the bank’s net income decreased to $4 billion and its bad debt losses increased to $26.8 billion in 2008.

Although Bank of America had its own mortgage business, most of the bad debt write off could be attributed to the purchase of Countrywide. In subsequent years, the bank continued to report large but decreasing bad debt write offs. In 2009 Bank of America’s bad debt write off was $48.5 billion, it decreased to $28.4 billion in 2010 and finally to $13.4 billion in 2011.  While it is a positive for Bank of America that it has reduced its bad debt write offs in each of the last three years. Many investors find it troubling that they are unable to determine the amount of the banks off balance sheet bad debt.

As if the bad debt write offs were not bad enough, over the last two years, Bank of America has realized marked decreases in revenues and net income. Unfortunately for Bank of America, federal regulations could contribute to a continuing of this trend. In October of 2011, a new federal rule went into effect that limits the fees banks can levy on merchants every time a consumer swipes a debit card to make a purchase. The new limit is expected to cost the banks about $6.6 billion in revenue a year, beginning in 2012, according to Javelin Strategy and Research.” That comes on top of another loss, of “$5.6 billion, from new rules restricting overdraft fees, which were widely seen as onerous and went into effect in July 2010.”   Bank of America attempted to slow the revenue losses by proposing a $5 fee for those who made purchases with their debit cards. However, the customer outcry was so huge that the bank decided “The revenue the bank expected to raise from the debit fee was not worth the damage to its reputation”.

Despite the fact that the bank will continue to be challenged by declining revenues and huge bad debt write-offs investors do have some reasons to be positive. For starters Bank of America as part of a five bank $25 billion settlement agreed to pay $5.9 billion. The settlement was made to resolve lawsuits over faulty foreclosures and the handling of requests for loan modifications. The other banks involved in the settlement were JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and Ally Financial. The settlement should help to make the banks future legal concerns more transparent. The banks $5.9 billion foreclosure settlement should be seen as an important step towards getting its sub-prime loan problems behind it.

In additional good news on March 13th broke out that Bank of America along with eighteen other banks passed the Federal government’s stress test. “The move gave the bank better capital ratios under the stress test than nine of 19 banks when counting proposed dividend increases and share buybacks.” Unfortunately it left the bank out of another round of improved payouts to shareholders.  The banks test scores were not as good as competitors like JP Morgan Chase, Wells Fargo or US Bancorp (USB). But, by passing the stress test, “Bank of America could be in a position to ask for a modest dividend increase next year but no share buybacks.”

While it is true that Bank of America’s stock has performed extremely well over the last four months, potential investors should be careful about this stock. The bank’s earnings are unlikely to improve because it has been unable to resolve the problems that it has as a result of decreasing revenues, and a large but undetermined bad debt liability. I believe that the stock is due for a correction and that investors that have held this stock during its recent rally should consider taking profits.