Bank of America's Feeling Very Confident!
Last week Bank of America (BAC) announced that its board of directors approved a stock buyback program valued up to $5 billion in its common stock and $5.5 billion in its preferred stock. This news comes after the bank successfully passed a "stress test" by the Federal Reserve revealing that Bank of America had made considerable progress with its cash levels.
Bank of America said that this buyback program will be under review and will be predicated on (among other things) the bank's cash position, liquidity, financial performance and stock price. Management did say, however, that they can cancel this program at any time. For now, investors have to feel good about the level of confidence that comes with this announcement, which affirms the progress of BofA's turnaround.
The bank had been under a comprehensive restructuring plan that included 10% headcount reduction, debt extinguishment etc. Some of which has resulted in notable improvements in all facets of the operation. The bank also continues to bolster its balance sheet as its Basel 3 Tier 1 common capital ratio continues to improve. Basel 3 is a global regulatory standard on bank capital adequacy, which the Fed appeared to have liked. It serves to prevent “too big to fail” type scenarios by enforcing not only bank capital requirements, but also adding minimum standards on liquidity and leverage.
Basel 3 requires banks to hold 4.5% of common equity. This is an area in which CEO Brian Moynihan has taken a personal interest as it has served to build back Bank of America's trust. To that end, the Bank is doing more business with customers and clients. Customer deposits continue to improve and mortgage originations are up – recently surpassing 11 million in mobile customers.
Moynihan recently said, "Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues." It's worth noting that rival banks also passed this important test, including Wells Fargo (WFC) and Citigroup (C), which had its proposals for dividend increase and share buyback denied by the Fed. Bank of America experienced a similar denial last year when it asked to raise its penny-per-quarter payout or to buy back shares.
Instead, Bank of America would continue to build capital as it works to absorb mortgage-related losses and meet new international standards. Unfortunately, Bank of America's test performance was not considered to have reached the "higher quality" status enjoyed by JPMorgan Chase (JPM) and Wells Fargo, which differentiate themselves with higher dividend yields and share repurchase plans.
Nevertheless, Bank of America showed progress in improving its capital levels; I think this was the key take away here. The bank is certainly not out of the woods yet. I think there are opportunities to boost revenue and with ongoing restructuring efforts, the bottom will begin to shore up as well. I think the bank now has a blueprint toward sustainable growth -- one that investors want to see extended over the next several years.
Despite the 52-week high, I think these shares can still move higher over the long term. When compared to the bank's book value, a case can be made that it is still trading at a slight discount. It wouldn't surprise me to see the stock reach $15 by the second half of the year.