Could Bank of America Double Again in 2013?

As 2012 winds down, it's time to take a look at some of the stock market's newsmakers as investors search for clues as to how their favorite stocks will behave in the coming year.

One of the market's darlings, Bank of America (NYSE: BAC  ) , is looking quite perky lately as it begins to respond to the ministrations of CEO Brian Moynihan -- whose Project New BAC deserves oodles of credit for the bank's current buff condition. Considering how its malaise appeared to be developing into a chronic condition until very recently, I wondered whether Dr. Moynihan's prescription will continue to spur B of A's recovery into the New Year.

So, here are two of the biggest issues I see facing B of A in 2013 and how they may affect the bank over the next 12 months or so.

A stress test win, and a dividend increase
The bank's hardy capital cushion should cut some ice with the Federal Reserve this year, as the new year brings another round of stress tests for the nation's biggest banks. Although Moynihan isn't saying  whether he will ask for a dividend increase or permission to buy back company stock, it's a sure bet he feels the bank is ready for either scenario -- or both. And, with a Basel III capital ratio of 8.97%, he may be right.

Moynihan has also acknowledged that a vigorous income stream is necessary to impress the Fed, and his bank is revving up promising revenue sources. Does this guarantee that the government will allow an increased dividend? No, but considering how far the bank has come in the past year, I would be surprised if they didn't -- particularly since Moynihan has made it clear that he plans to continue with the business plan that brought Bank of America this far.

More mortgage-backed troubles
Although the bank has been working to get out from under the pile of toxic mortgages it bought along with Countrywide, things aren't looking too upbeat just yet. Recent developments in this realm seem to point to another downer of a year as the bank continues to do battle against a rising tide of mortgage-related misery.

As part of the $25 billion fraudclosure settlement earlier this year, it has come to light that Bank of America still has quite a mess on its hands. According to Bloomberg , an astonishing $64 billion in mortgages haven't brought in payments for six months or more. These loans comprise 3.3% of its portfolio -- and most of these are legacy loans from Countrywide. Worse still is that these loans haven't even entered foreclosure yet.

In comparison, JPMorgan Chase (NYSE: JPM  ) and marathon mortgage lender Wells Fargo (NYSE: WFC  ) also have six-month delinquent loans, though these account for less than one percent of the total on each banks' books. Citigroup's (NYSE: C  ) share stands at 1.1% of all mortgage loans.

All this will add up to increased expenses for B of A, but may pale in comparison to lawsuits filed by the government on behalf of the government sponsored entities Fannie Mae and Freddie Mac. As I mentioned recently, the Federal Housing Finance Agency lawsuit is hovering over the above mentioned banks like the sword of Damocles. Add to that the recent "Hustle" case against B of A, and you've got double trouble for the big bank. Or, more specifically, triple  -- which is the amount of damages the bank could pay on this one -- since the Dept. of Justice filed this lawsuit under the umbrella of the False Claims Act.

If you're still not convinced that these types of lawsuits will continue to crop up and cause trouble well into the new year, consider this : Of the $1 trillion in toxic mortgage-backed securities analysts estimate will be litigated by various investors, Bank of America has over $417 billion of them in its Countrywide portfolio. To my mind, costs associated with these MBSes will be the biggest constraints on dividends going into 2013, and beyond.

Still, investors and analysts see plenty of upside...
Notwithstanding the mortgage issues -- which will affect B of A's peers to some extent, as well -- the recent rally in the bank's stock is proof that investors are feeling good about Bank of America again. The stock has doubled in value this year, and analysts at JPMorgan  have recently declared it a buy. More importantly, heavy-hitter Meredith Whitney got all warm and fuzzy about B of A last week, saying that the worst is over and declaring the bank a great investment opportunity. As fellow Fool Jonathan Yates notes, it is also a bargain, currently trading at approximately 54% of book value.

Although I don't quite agree with Whitney that B of A has emptied its trunk of all the junk that has been holding it back, I have to admit that the bank is going into 2013 in much better shape than it was in last year at this time. The big guy still has a lot of work to do, but the progress it has made in the past year bodes well for the future. Not bad for a year's work.

As Bank of America enters the new year, these issues will have a great impact on how the bank performs  as a long-term investment. To learn more about the most talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.


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