Is Bank of America Shaking Off its Woes?

By MIRIAM GOTTFRIED for Barron's MONDAY, JANUARY 3, 2011

Original Post: http://online.barrons.com/article/SB50001424052970203793504576059811600824004.html?mod=BOL_hps_highlight


Shareholders have reason to celebrate the news that the bank has agreed to buy back bad loans from Fannie Mae and Freddie Mac.


Are shares of Bank of America (ticker: BAC) finally shaking off their misery? It sure seems that way.

Early Monday, BofA announced that it would take a $3 billion provision to buy back bad loans from Fannie Mae and Freddie Mac that were issued by its embattled Countrywide Financial division.

BofA expects to post a $2 billion write-down in the fourth quarter as part of the repurchase agreement and said the charge will have no impact on its Tier 1 capital ratio or tangible equity ratios.

The settlement with Fannie and Freddie—the two leading so-called government-sponsored entities (GSEs)—is a huge step in the bank's effort to clean up problems that surfaced during the housing crisis. The mortgages originated by Countrywide emerged as some of the worst issued during the run-up to the crisis, and BofA has had to handle growing loan losses since it bought Countrywide in 2008.

BofA shares were up 60 cents, or 4.5%, to $13.95 in mid-morning trading Monday as investors cheered the better-than-expected terms of the agreement.

Indeed, the time looks right to hitch a ride on the bank's rebounding fortunes.

The deal represents the removal of one of the biggest issues overshadowing the bank's shares, and gives BofA CEO Brian Monyihan the opportunity to improve the bank's financial picture.

"This is a late Christmas present from [U.S. Treasury Secretary] Tim Geithner to Brian Moynihan," says Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.

Whalen said he was looking for $40 billion to $50 billion in total loan repurchase expense over the next few years, but after today's announcement, he now thinks the total will be a little under $10 billion—a fraction of what would have been expected based on the losses. This will be a positive for shareholders and bondholders, he said.

"To me, this is just evidence that Washington was listening to the Street," Whalen says. "We now have finality on one of the biggest issues facing Brian Moynihan, and he can now be much more aggressive."

To be sure, BofA's repurchase obligations with Fannie and Freddie are not the only problems facing the bank these days.

Mortgage repurchase demands from non-GSEs are not included in the settlement and could continue to pose a challenge.

In addition, some BofA followers remain concerned about a potential threat from WikiLeaks, the international non-profit organization that publishes leaked documents on its Web site. WikiLeaks founder Julian Assange has suggested that the site has access to documents that could damage a large bank, and there has been speculation that BofA was the bank in question.

But the Fannie and Freddie issue was the most important one for investors, Whalen says, and its resolution should send them piling into the sector.

Mike Mayo, an analyst with Credit Agricole, says that the issue brings important closure for the bank and could be symbolic of the beginning of a new chapter.

"While the dollar amount of the cost is in the range of what we expected for the GSE-related exposure, the move helps to eliminate the uncertainty as to the ultimate amount and effectively front-loads the GSE-related costs of the next couple years," he wrote in a research note.

"Moreover it shows a willingness of Bank of America to take more control of the situation, and sets a tone for the year by having this move announced on Day 1 of the new year."

Mayo rates BofA at Buy with a $15 price target.

Jeff Harte, an analyst with Sandler O'Neill, also rates BofA at Buy, but sets his price target at $20.

Harte wrote in a note that the provision would reduce his fourth-quarter earnings per share estimate to a loss of 20 cents from a gain of 20 cents, but expects minimal impact on tangible book value.

"This should be a net positive for Bank of America shares," he wrote.