BofA’s Stock Is Good For $10 As Turnaround Visible

Bank of America (NYSE:BAC) reported one of its better quarterly performances since the economic recession of 2008, with earnings of just under $2.5 billion for the period. ^[1] An improving credit environment combined with the bank’s focused efforts on cutting down costs helped offset lower revenues from the overall slowdown in global markets the last three months. Investors, however, raised the red flag yet again over the bank’s troubled mortgage portfolio, leading to a decline of more than 11% in Bank of America’s share price within days of its earnings announcement.

We stick to our $10 price estimate for Bank of America’s stock – a figure nearly 40% above its current market price. The overwhelming pessimism among investors toward banking stocks in the wake of a deteriorating European debt situation is largely responsible for this price parity besides the uncertainty regarding the quality of Bank of America’s huge mortgage portfolio.

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

Mortgage Business Continues to Lose Money

Bank of America’s consumer real estate business woes are still long from over, with the unit reporting a pre-tax loss of $1.2 billion for the quarter. This is still notably better than the $1.7 billion pre-tax loss last quarter and the colossal $21.4 billion loss for Q2 2011 when the bank booked a $8.5 billion mortgage settlement. Bank of America’s mortgage business has been reporting in the red each quarter since 2008 – a situation made worse by its acquisition of Countrywide following the economic recession.

A comforting trend with the business though is the steady decline in mortgage-related loss provisions. The provisions dropped to under $200 million for Q2 2012 from $500 million in Q1 2012 and about $1 billion in Q4 2011.

Project BAC Seems to be on the Right Track

Late last year, Bank of America kicked-off Project BAC – a two-phased multi-year plan – to completely revamp its business model and implement large-scale job cuts to rein in costs. The plan outlined a reduction in nearly 30,000 jobs, of which an estimated 12,000 have already been trimmed.

The fact that Bank of America’s non-interest expenses have been on the decline over the last two quarters without a negative impact on revenue figures is indicative of the effectiveness of the cost-cutting measures. The bank’s quarterly non-interest expenses fell to just above $17 billion from $19.1 billion in Q1 2012 and almost $23 billion in Q2 2011.

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1. Q2 2012 Earnings Press Release, Bank of America Press Releases, Jul 18 2012 [↩]