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It's Time to Buy Bank of America

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Ever since Bank of America (NYSE: BAC  ) reported third-quarter earnings last month, an outlandish idea keeps recurring to me. It's so ridiculous, and perhaps even so intellectually embarrassing, that I haven't shared it with anyone, not even my wife -- though it's highly doubtful she'd care, despite the fact that we own shares in the bank. However, after turning the idea over and over in my head for nearly a month now, I've decided to go public with it.

Before doing so, let me say two things. To those of you who are new to the Bank of America party, what I'm about to say won't seem outlandish at all. That's awesome. You've probably aged less over the last few years than the people who'll think I'm an idiot. But to those of you who have either owned shares in the megabank, or watched it struggle to regain its footing since the financial crisis, I would beg of you to hold your laughter.

With that out of the way, here we go. I believe that Bank of America is out of the woods. It's healthy, it's well-capitalized, and it very soon should start turning a robust profit and distributing a portion of the earnings to shareholders. As a result, and assuming my hunch is accurate, those of you who have stuck with the bank over the last few years may very soon be rewarded for your patience.

The three aliments plaguing B of A
Since the financial crisis, there have been three principle forces holding Bank of America in check. The first concerned its portfolio of toxic loans. To give you some idea about the scale of this problem, over the last four calendar years alone, it has charged off a staggering $105 billion in bad loans, the majority of which were made to subprime borrowers. This is notably twice the figure that Wells Fargo (NYSE: WFC  ) , now the nation's largest mortgage originator by leaps and bounds, charged off during the same time period.

The second force has been the liability accompanying its acquisition of Countrywide Financial, the largest subprime mortgage originator in the lead-up to the crisis. As recent as the second quarter of this year, Bank of America claimed to be unable to calculate its potential exposure to so-called repurchase claims from public and private investors in mortgage-backed securities populated by Countrywide's faulty mortgages. Taking a stab in the dark at the time, I accordingly estimated that it could fall anywhere between $4.7 billion and $40.9 billion. And this range didn't include costs stemming from the multitude of other lawsuits that Bank of America has faced over the last few years.

And the third force has been its regulatory capital level. Due, in large part, to losses related to the two forces just mentioned, Bank of America struggled for a considerable time to meet the now-heightened capital cushions mandated by financial regulators. In the now-annual stress test conducted last year, its tier 1 common capital ratio dropped to 5.7% after being subjected to a hypothetical scenario akin to the recent crisis. This placed it 15th out of only 19 banks. And it was dead last among the three other so-called too-big-to-fail banks JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Wells Fargo.

Why it's out of the woods now
As I said at the beginning, however, there's solid evidence now on each front to be optimistic that the worst is behind Bank of America. With respect to credit risk, and to point to only one indication of this, its provisions for loan losses have dropped from nearly $50 billion on a trailing 12-month time period in the fourth quarter of 2009 to less than $9 billion over the most recent 12 months. Although this is still roughly double what it arguably should be, pre-crisis levels are now well within reach.

With respect to liability, while new lawsuits continue to trickle in, the lion's share are, if not already over and done with, largely provisioned for. The biggest and least appreciated relief in this regard was the bank's acknowledgement that its maximum exposure to repurchase claims is now capped at $6 billion in excess of allocated reserves.

Finally, with respect to capital, as my colleague Amanda Alix recently observed, Bank of America is now the best capitalized too-big-to-fail bank in the country, with a tier 1 capital ratio under the new regulatory guidelines of 8.97%. It should be noted, however, that the actual implementation of these guidelines was just pushed back beyond the beginning of next year, if not later. And to top things off, a global financial watchdog recently estimated the bank's regulatory capital ratio could be as much as one full percentage point less than similarly-sized competitors, like JPMorgan and Citigroup, both of which rely to a greater extent on riskier investment banking operations.

When we'll know if I'm right
I'm going to tell you exactly when we'll know if I'm right or not. At the end of last week, the Federal Reserve released the upcoming 2013 stress test instructions. Because the capital plans must be submitted by Jan. 7, we should know shortly thereafter whether or not Bank of America gets approval to increase its dividend or initiate a share buyback program -- either of which would serve as a massive catalyst for the bank's shares.

All this being said, I don't expect you to just take my word for all of this. To see why our senior banking analyst Anand Chokkavelu believes shares in the bank could "double or triple in the next five years," I encourage you to download our in-depth report on Bank of America. Given the impending deadline I just mentioned, you'd be wise to read it sooner rather than later. To access a copy instantly, simply click here now.

Read/Post Comments (23) | Recommend This Article (87)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2012, at 5:53 PM, Sotograndeman wrote:

    Despite your attempt to make the reader think you're telling us something new, your article reminds me of Buffett's warning that: "You pay a high price for a cheery concensus."

    The time to buy BAC was a year ago when it was trading at $5 or $6 and Buffett stepped in to backstop. Admittedly he got preferential terms - how could he not - but his longterm commitment was pretty much a guarantee that it would not go under. In addition, Bruce Berkowitz was giving us his case for betting big on BAC at a time when the markets couldn't unload it fast enough.

    Over the past year, other value investors like Bill Nygren have been picking up the stock and proclaiming how undervalued it was.

    There's still plenty of upside from here, but the real contrarian, value play is long past.

  • Report this Comment On November 12, 2012, at 6:31 PM, Colinnyc wrote:

    Forget about the financials: what's more significant is BOA's toxic culture. The bank always has treated its customers poorly -- first with nickel and dime fees, a champion of uncompetitive rates, and wretched customer service. The uncaring face the bank presents to its customers and whether or not it take serious steps to improve that profile is the real stress test.

    Virtually everyone I know left BOA long before Occupy Wall Street.

  • Report this Comment On November 12, 2012, at 6:46 PM, thommittag wrote:

    I would never touch Bank of America, They have an unscrupulous culture and do not care if thieves misuse their products and ruin consumer Credit Reports.

  • Report this Comment On November 12, 2012, at 7:02 PM, Drbk2 wrote:

    Why post a comment when you just delete them? You are truly Motley Morons...

  • Report this Comment On November 12, 2012, at 7:32 PM, Mwojnarowicz wrote:

    This was my best money pitcher in 2012. Profited from both the stock price and covered call options.

    Some bad behavior, sure. Well documented.

    Question is: Do we want to make money or whine?

  • Report this Comment On November 12, 2012, at 10:01 PM, Panther007 wrote:

    BOA has forged documents on foreclosed home loan proceedings. They have changed lawyers for customers trying to modify their loans more than 10 times hopng that weary homeowners who have a right to their own property will just give up and leave so they can have property. BOA has repackaged and repackaged loans so that deeds are is an absolute nightmare of a problem for homeowners holding any kind of loan with BOA.

    You think it is "healthy" and "well capitalized?" think again. Run far, far away from this old bully.

  • Report this Comment On November 12, 2012, at 10:04 PM, kalimon789123 wrote:

    I say make wine...

  • Report this Comment On November 12, 2012, at 10:08 PM, Tiingall wrote:

    What most of the banks have demonstrated over the late ten years is they are in the business of making profits out of collapsing the economy and a lot of other people's financial future and well being.

    They are still in business because they are "too big to fail" and a lot of tax payers' money has gone into propping them up. In fact the county has gone into massive national debt to stop them from falling over.

    Any profit the banks turn is a BIG loss for everyone else. THe facts are:

    The banks don't do anything but shuffle our money; they don't create anything solid that can be sold or traded. They just try to live off the work and creativity of others. And they have been very successful at it; at our very substantial expense.

    The fundamental flaw in the banking system still exists - personal responsibility. They happily sell scam loans, launder Mexican drug cartel money, and falsify documentation so they can sell our money to terrorist groups. And when they get fined, we pay those, through lower interest, higher fees and worse service. The perpetrators of this criminal activity are still getting their big salaries and laughing at us. They do not have to personally pay the fine or replace depositors funds which the "invested" in their scams.

    Until that situation changes, the evidence of the last five years is they will continue to use whatever money is given to them to create scams and illegal activity to ensure they get a big salary at our expense. They don't care if funding terrorists or laundering Mexican Drug money is killing people, or taking depositors funds to "invest" in scam loans is killing the economy and jobs. Their repeatedly demonstrated goal is to move our money we generate in real jobs, creativity and innovation into their personal pockets; regardless of the consequences to the rest of us, and out children's financial future.

    Foolish investors look for real companies that create and generate wealth, jobs and income. Not criminal parasites.

    Don't give the banks a penny in share purchases. It will continue to cost us dearly in the long-run. More dead soldiers and young people in the short term, and lower incomes and fewer jobs in the the longer term.

    Send them a message. We don't want to participate in their criminal activity, we have no interest in their blood and drug stained profits and we prefer to invest in businesses that actually do something positive for people, the community and the future of our children.

  • Report this Comment On November 13, 2012, at 4:56 AM, clbjblk wrote:

    The Fools Bank try a stock to put some puts on now a bank WBK do you think there trend is over?

  • Report this Comment On November 13, 2012, at 11:35 AM, N797T wrote:

    Wow! so much negativity!

    I am a long term banking customer of BofA, Well Fargo and Chase. They each have their issues but the one area BofA shines is the bill pay protocol of leaving your money in your account until a payment clears your account. Chase and Wells Fargo take the funds on the day they generate a check. They use your money for free for as long as it takes for a check to clear. The check they mail may never clear and you will find it difficult to determine if in fact it ever cleared. The BofA system clearly shows when a check sent out from your online bill pay account is paid and the day it clears. Electronic payments clear in a day but many paper checks take a week or more during which time Chase and Wells Fargo use YOUR money. I feel the bill pay practices used by Chase and Wells Fargo are immoral and unethical at the least and may be illegal.

    Customer service has improved markedly at BofA in recent months and the new services they are adding has caused me to return to BofA for my personal and business banking needs.

    Wells Fargo and Chase on the surface put on a good customer service show but down deep they are horrible.

    I agree with Fool about the future of BofA.

  • Report this Comment On November 13, 2012, at 12:16 PM, callmegodfather1 wrote:

    No mention of the impact of the election or the tsunami of new regulations descending on Banking at this moment? IMO buying common shares of any bank today is speculation not investing.

  • Report this Comment On November 13, 2012, at 2:12 PM, TMFDarwood11 wrote:

    From a pure money and investment perspective, I think there are better places to put my money. Besides, because I have invested via mutual funds, about 10.9% of my portfolio is in "financial services." That's enough in my opinion.

    "Do we want to make money or whine?" That comment opens the door to a lot of possibilities, many of which I consider unpalatable.

  • Report this Comment On November 13, 2012, at 4:49 PM, hiddenflem wrote:

    Hard to overlook their crappy customer service. I'm a fan of trying out companies if I can before buying them and this is one company I absolutely do not believe in.

  • Report this Comment On November 16, 2012, at 1:45 PM, CRACKTACTOR wrote:

    Dead money- only a true Fool would invest in BAC, unless you want to churn a client's account. They have no idea what Customer Service means, there are more branches than Starbucks (accept in Alabama, for some reason), so their overhead is huge and they will most likely engineer a reverse split, a la C, shortly.

    Oh, and buying Merrill Lynch was genius: who in their right mind would trust their investments to a bunch of know nothing "advisers" when you can trade for next to nothing online?

  • Report this Comment On November 16, 2012, at 2:26 PM, Hibiscusanole wrote:

    Glad to see so many did not want the stock for the same reason I rejected it, bad treatment as a customer.

  • Report this Comment On November 16, 2012, at 3:13 PM, WineHouse wrote:

    The back-room services at Merrill Lynch have become absolutely inept now that Bank of America has taken control of ML. I mean atrociously inept. I have been with my financial advisor, who is excellent and scrupulously honest and decent, since the mid-1980's; but over the past couple of years he has spent most of his time on the phone with me apologizing for various major messes that happened beyond his control that can only be laid at the feet of the back-room operations. I don't think it's an attempt to be crooked; I think it's the result of hiring incompetent back-room staff on the cheap to save money.

  • Report this Comment On November 16, 2012, at 9:19 PM, dcorley wrote:

    I don't understand all of the complaining.

    The author is not touting the banks services, he is touting their money making abilities.

    I personally would never have an account with BofA.

    They are truly awful.

    I own BofA stock, I like their business model: Cheat and steal every nickel. My kind of scum.

  • Report this Comment On November 18, 2012, at 8:58 AM, cordeman wrote:

    One thing every company, in every nation, has in common, no matter what flag flies over their head, or language they speak, is A BANK.

    I read once that when John Dillinger was asked, why he picked on Banks to rob during the great depression years, he replied 'Because that's where the money is.

    Those who control the money, especially Gold, the real money, control economies, directly, or indirectly, from the household purse, to the largest International companies, and governments.

    So let's not waste time and energy running down banks - they are the epicentre of trade. Love 'em, or not, whether they are run by a bunch of criminals, or you merely believe they are, we are stuck with them and THEY CALL THE SHOTS.

    And, it is nothing new.

    In our favour, at least, as yet, they have to live on this planet, there is no escape, so they are not going to destroy it. Change things constantly to favour them, yes, destroy no. They merely focus on securing their tenure, and control.

    One of the most advantageous assets of BofA is - It's name. Laugh, or sneer, you may. What's in a name, you may ask? If you do, then your limited imagination is causing your failure to see.

    Any words of explanation would be wasted on those who do not see that it is a key reason it was not, and will not, be allowed to fail. Psychology is at work constantly in our financial world (and, I would say, in most other areas of our nurturing).

    I leave you with this, for signs of a sustained, meaningful economic recovery - WATCH THE BANKS - which includes - Bank of America.

  • Report this Comment On November 18, 2012, at 4:45 PM, Spider8r wrote:

    BOA will probably increase in share price, dividend, etc. like you said, as will the banking sector in times like these, but really it is the very dregs of the megabanks, the worst one of the group and I would not touch it with anything but Vegas money, if then, I would stick to better run banks like WFC or C (who seems to have learned its lesson unlike the punk you recommend) or, as I have done, go to the much better capitalized banks overseas like MFG...just compare balance sheets.

  • Report this Comment On November 21, 2012, at 1:34 PM, constructive wrote:

    "...JPMorgan and Citigroup, both of which rely to a greater extent on riskier investment banking operations [than BoA]."

    Don't think this is true. BAML is bigger than Citigroup Investment Banking.

  • Report this Comment On November 21, 2012, at 1:37 PM, constructive wrote:

    As to whether BoA deserves to use a lower capital ratio than historically superior businesses like WFC and JPM, probably not.

  • Report this Comment On November 23, 2012, at 2:56 PM, nonickyet6 wrote:

    well I guess I'm in the small camp that thinks Bank of America is a good operation and a moneymaking operation. I may not be as qualified to discuss this Corporation as many of you. On the other hand, I have made money with in the past. And I think as things start to turn around the have a good chance of increasing their earnings substantially.

    Unfortunately I got bullish on them too soon. But I'm hanging on to them and will do so for some time. While my position is under water now I think that in a few years, Bank of America will be selling in the low 30s. I also think that the dividend will go up substantially. That's of course assuming that the " Fiscal Cliff" doesn't catch us in a free fall. as long as the tax rate on dividends is the same as taxes on income and I think dividends will have a substantial positive influence on the stock price.

    Historically, Bank of America has tried to keep their dividends in the range of 3%. So if you buy Bank of America now and it pays around 3% and the stock continues to rise and the dividend maintains around 3% your effective dividend rate goes up right along with it. For example if the stock is at $10 and the dividend is three cents and the stock goes to $30 they raised the dividend to nine cents you will have tripled your yield to 9%. I think that is substantially doable. Yes there is risk, but I think it is reasonable. And I don't think you'll be able to find 9% coming from any bank deposits.

  • Report this Comment On December 13, 2012, at 12:10 PM, onewinner wrote:

    I bought BAC at $10 in 2009. Watched it go to $20 and then fall to $6 in 2012. I acquired 1200 shares at avg. $10 price during this time. The last hundred shares bought just before Warren Buffett. Looking forward to double or triple price!

    Fool on (long that it)!!

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