Wednesday, January 20, 2010

Bank Of America 02.02.10

Bank of America Mgmt Meeting Highlights Opportunities for Credit & Efficiency Improvements
Investment conclusion: Our recent meeting with BAC management highlighted opportunities for credit and
efficiency improvements in the consumer business. Longer-term deposit growth drivers include mass
affluent and higher-end segments (in part aided by MER acquisition). Efficiencies come from reinvesting to push down error rates and enabling customers to choose their basic products and delivery channels and then pay for value-added services.

What's new: We recently met with three members of the BAC management team: Joe Price, President of
Consumer, Small Business & Card Banking; Susan Faulkner, Executive in Deposits & Consumer Payments; and Neil Cotty, Chief Accounting Officer & Interim CFO. Management discussed the state of the consumer, card, deposits, and payments businesses, as well as the regulatory environment and the internal pulse of the organization now that it has exited TARP and appointed a new CEO. Management was measured, but optimistic on the future given credit and efficiency improvements. Investment thesis: BAC is our top pick in Large Cap Banks. It has a skew to early cycle capital markets revenues (25% of revenues) and card (18% of managed
loan balances). We have expected that card NCOs likely peaked in 3Q09 (which appears to be playing out), and we anticipate total NPLs peaking in 1H10. Our call is also driven by a decline in regulatory and political uncertainty as capital rules and financial services reform\ are determined. We have an Attractive view on the
Large Cap Bank group, driven by an expectation for
deceleration in jobless claims/unemployment and a
stabilizing real GDP growth rate of 2-2.5%.
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Full report here

•Bulls Say

B of A is a dominant player in some of the most dynamic, high-growth regions in the country, such as California, Florida, and Texas. The sunshine that helped attract growth in the early part of the decade is still shining, and should help reignite growth after the recession wanes.

The bank has an immense deposit base of $975 billion, giving it a stable, low-cost source of funding. Only 10% of B of A's estimated 8 million affluent customers currently use its wealth-management products. B of A could rapidly increase fees in this division just by attracting more of its checking account customers.

Merrill Lynch has the premier wealth-management business in the nation, with more than 16,000 advisors. This wide-moat business is its crown jewel.

•Bears Say
The addition of Merrill significantly alters B of A's revenue and earnings structure. We're not big fans of investment banking right now, and we worry that the downside of the investment banking business could more than offset the benefit of the wealth-management


Although the bank's trading operations were very profitable in the past, the credit crunch wiped out the investment bank's earnings in 2007 and 2008. With the securities markets recovering, we expect loan charge-offs to drive losses in 2009 and much of 2010.

We believe the credit crisis will compel the government to increase capital requirements for all banks. As one of the top four, we expect the government to add something extra to B of A's capital burden to compensate for its "too-big-to-fail" status.[morningstar]

We rate Bank of America High Risk, largely because of near term headwinds as
the economy remains weak. Additionally, BAC has relatively large consumer
exposure via home equity and credit card where losses may be greater than
anticipated. Other risks include general execution risk and a prolonged, sharp
decline in U.S. capital markets activity and asset valuations.
Other Negative Risk:

•Consumer credit downturn - Bank of America has relatively high consumer
credit exposure. Post-MBNA acquisition, a significant portion of the
combined Bank of America loan portfolio is credit cards, leaving the
company susceptible to a downturn in industry receivables growth and/or
rapid deterioration in consumer credit, as in a downturn, consumers first
tend to default on credit cards. In addition, the sizeable home equity
portfolio is also susceptible to a real estate led downturn.

•Merrill Lynch/Countrywide integration and litigation risk -

The Countrywide acquisition closed in 3Q08. This transaction presents integration risk given the volatile state of the mortgage market. In addition, there is litigation risk attached to Countrywide relating to mortgage lending practices. Merrill Lynch closed at the end of 2008. Like any large scale transaction, this deal presents execution risk.
Positive Risk:
•Abbreviated and/or muted consumer credit cycle - If consumer credit does not deteriorate as much as expected or improves faster than expected Bank of America would be in a position to benefit due to strong consumer oriented businesses.If the impact on the company from any of these factors proves to be greater than we anticipate, the stock could have difficulty achieving our target price. On the other hand, we may have overestimated these risk factors and the stock could increase more than we expect. [citibank]

I just wanna disclose I am short the stock and I dont agree with one single thing on this report
full report

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