Bank of America faces earnings headwinds, says Credit Suisse
Jul 6th 2009 6:30PM
Updated Dec 4th 2009 5:57PM
Bank of America (BAC), one of the world's largest financial services companies, is set to report earnings at the end of next week . According to a research note issued by analysts at Credit Suisse (CS), the numbers could be ugly. Bloomberg says that estimates of the bank's results, excluding one-time items, will be negative as a 10 percent jump in expenses related to bad loans will end up costing the bank more than $7 billion on the quarter.
After factoring in gains from selling assets, Bank of America's likely headline earnings per share of $0.32 will probably be closer to a loss of $0.15 per share from its core operations, the Credit Suisse report concludes. The firm has a "Neutral" rating and $12 target price on Bank of America's stock.
If rising loan losses cause Bank of America to report a loss, the company will be in the crosshairs of critics of the "stress tests" undertaken by the Treasury Department to ascertain whether or not banks were adequately capitalized. Many have argued that the assumptions used were flawed and designed to portray the banks in a more flattering light. However, Bank of America chief financial officer Joe Price said that the stress test was much more harsh than internal estimates which required the bank to raise $33.9 billion in extra capital, the most of the 19 financial institutions studied.
The Bloomberg story does note that Credit Suisse is more negative on Bank of America than some other firms. Contrasting its view is Morgan Stanley, which has an "Overweight" rating and $32 price target on the stock. In a June 10 research note obtained by DailyFinance, Morgan Stanley describes Bank of America as its "top pick in large cap banks," saying that new opportunities for revenues in Investment Banking and from cross-selling services will help the bank to return to profitability in 2010 and beyond. Morgan Stanley also expects Bank of America to repay TARP funds in two installments by the end of 2009, likely after converting more of the government's preferred stake into common stock.
Regardless of the analysts' outlook for the stock, all camps are in agreement on one thing: There are still tens of billions of dollars in losses that Bank of America will need to take. In addition to the existing $26 billion in provisions, analysts at Morgan Stanley -- the optimists in this case -- estimate more than $73 billion in further provisions by the end of 2010. The worst-case scenario from the government-run stress tests, pegged Bank of America as having to take $136 billion in loan losses over the same time.
Last month, DailyFinance reported that Citigroup (C) chief executive Vikram Pandit will be on the hot seat following second quarter earnings, while Bank of America 's Ken Lewis is likely to be safe. With Citigroup set to report its earnings the same day as Bank of America, the tenure of one or more of these large bank executives could be drawing to a close.
James Cullen also edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns BAC, but has no personal position in the stocks mentioned above.