NEW YORK - Bank of America stock is down close to 20% on market fear. The largest bank in America now sells at less than half the amount of Wells Fargo the nation's fourth largest bank by assets despite BAC being twice the size. Lets also add in that Wells Fargo's price also makes absolutely no sense and should trade significantly higher.
The largest bank in Canada, Royal Bank now has a market capitalization of $70 billion with $700 billion in assets and around $6 billion in average earnings. (Sounds pretty cheap right). Then there is BAC with $2.2 trillion in assets and even the most bearish analyst would conclude that BAC can earn between $12 and $16 billion without breaking a sweat.
BAC has $144 billion of tangible equity. Even if had to buy back all its distressed mortgages of $200 billion of mortgages no longer on the books if they were bought back after tax it would not be more than a $40 billion loss.
If that is taken out of equity the company would have around $100 billion of equity and have a tier 1 ratio of around 7% which is well above the required minimum. This compares to Royal Bank which has current tangible equity of $30 billion.
After this write-down (which won't happen) BAC can easily earn $16 billion required and even if they can never earn more than this amount throughout time and they keep $16 billion a year until they reach 10% capital or until they get tangible equity of $160 billion and than after this they redistribute it to its owners because of the possible affects of regulation. Then the value of the BAC $16 billion earnings stream alone would account for the stock being at least $14. This is based on the intrinsic value of BAC.
Despite all these metrics a $160 to $300 billion company is selling for $69 billion. Even under the harshest write-downs and assuming draconian regulation.
Without the writedowns which likely will be at most $10 billion the value of the company should be around $16 to $20 a share currently.
The market gets in the habit of going on momentum swings. This may be one of the most illogical moves ever seen.
Last time BAC went to $7 and dropped to $2 it held over $40 billion of TARP funds and the U.S. economy was in a deep recession.
Today it is a manufactured recession no-one at home cares about the market. The economy is growing. The market is reacting to themselves.
what are you smoking?
ReplyDeleteAgreed. Fear is in control. Fear Fear Fear... and I will buy LEAPs
ReplyDeleteYou are so right...Buy Buy Buy!
ReplyDeleteabsolutely right...whatever ur smoking is good stuff !
ReplyDeleteMargin calls being made, people are being forced to cash out. I will still wait and see, once in the $5 / share zone i will snap it up and go all in.
ReplyDeleteRoyal Bank of Canada has a Tier 1 ratio ABOVE 13%. How can this compare to BAC's 7%?! You should revisit your arithmetic 101 class...
ReplyDeletebe greedy when others are fearful .... i would buy some long dated calls on this shit.
ReplyDeleteIt's selling at half the price? Really? That's how you open this? ANYONE who trades on the market knows that stock price has almost nothing with the value (or valuation) of a company. If it did, a 2:1 stock split would mean the company's value would instantly double!! BAC offers 10.1B shares, while WFC offers only 5.2B shares (half as many, thus twice as valuable). The market is generally valuing both companies equally (based on true numbers and future speculation).
ReplyDeleteNegative interest rates are on their way fellas.
ReplyDeleteI just bout 5,000 shares!! Woooo hooo!!!
ReplyDeleteBAC's going Bankrupt ahhhhhh
ReplyDeleteRoyal Bank's Tier 1 has a lower denominator.
ReplyDeleteIn Canada tier 1 are calculated differently. An international standard will greatly lower RBC's tier 1.
Does anyone know...if I buy one of those Memory Foam matress to stash my money, will it be able to track where my money goes?
ReplyDeleteI'm tired of $8 fees to see a teller at BOA.
Thoughtful and well written article. You did mention or allow for European bank exposure or contagion. It would be nice if you would cover that in a follow up article.
ReplyDeleteBAC has very little Europe exposure and the Eurzone is bailing out a lot of these governments now.
ReplyDeleteSo its a non issue for a couple of reasons. JPM has the most exposure $16 billion and they expect at most $3 billion of losses.
BAC's is around $3 billion so you can do the math the losses will be pretty small.
I don't know who these analysts are saying BAC is running out of money. Last I checked besides that mortgage payment of 9 billion last quarter the company made $3.7 billion of earnings and has around $900 billion of assets that can be quickly turned into cash or are cash.
The company could easily pay up 50 to $60 billion on top of the $20 or so its already paid.
The company is earning $4 billion or so a quarter so that is a loss at most of $46 billion and after tax about $10 billion.
So I don't know who are these people selling.