Although Italy's unsuccessful election has been giving markets the jitters this week, this fact doesn't excuse the drubbing Bank of America (BAC 2.06%) has been getting lately. After rising above the $12 level briefly twice this year, the big bank just can't seem to keep its proverbial head above that watermark. I'm finding this difficult to understand, mainly because of two big upcoming events: the Fed's unveiling of its bank stress test results on March 7, and the attendant results of the Comprehensive Capital Analysis and Review of bank holding companies.
Of course, peers JPMorgan Chase (JPM 1.94%), Wells Fargo (WFC 1.24%), and Citigroup (C 3.06%) will be rated, too. But it is B of A -- which has come so far since this time last year that it is poised to ace these tests with its newly svelte balance sheet and super-charged 9.25% capital ratio -- that investors should really be rooting for.
And yet, its stock price remains somewhat anemic, zig-zagging between the $11 mark and $12.25 or so. Why aren't investors excitedly bidding it up? If the idea of a stellar bill of financial health, with its attendant stock buybacks and -- drum roll, please -- dividend hike can't get investors enthused, what will?
Admittedly stumped over this conundrum, I decided to take a look around to see if I could perhaps identify the issues keeping the big guy from basking in what I consider to be well-deserved pre-test-win glory.
Problem: CEO Moynihan's raise
Stuff really seemed to hit the fan shortly after the media splashed the news that CEO Brian Moynihan has scored a compensation increase for 2012, and an actual pay raise for this year. Now, considering all that the man has done to get the big bank into ship-shape, it seems petty for investors to punish the stock over this bit of news.
After all, B of A's stock did an amazing about-face last year, doubling in value -- albeit from a very low baseline. But, since the stock began falling the very next day, I think it is safe to say that this announcement had something to do with it. Why would this be?
A Forbes editorial may shed some light on this issue. The author thinks the stock award is not performance-based enough, since only half of the total award of 926,238 shares was performance-based. Of the 463,119 shares that were based on that metric, half again would vest only if the bank meets certain goals for gains in adjusted tangible book value, while the other half would vest on achievement of specific targets for return on assets.
Where's the problem, you ask? The columnist points out that fully half these shares will pay out pretty much no matter what, even if the bank only maintains its current gains. As for the performance-based awards, the value will be determined at the end of 2015, though the exact measurements needed for vesting haven't been revealed. This differs from 2011, when Moynihan's entire stock award was based on performance targets.
Perhaps investors feel, too, that more of Moynihan's compensation should be based on performance metrics. For example, JPMorgan's Jamie Dimon took a pay cut of approximately 50% from 2011 levels to $11.5 million last year because of losses incurred during the London Whale fiasco.
However, despite the brouhaha about Citi's former CEO Vikram Pandit's pay last year, new chief Michael Corbat was paid $11.5 million for 2012, including a nice $4.2 million bonus, an anomaly for bankers last year. But, the bank's board has revamped the way executives are paid, putting more emphasis on performance. Considering that Corbat was Citi's CEO for only the last quarter of 2012, however, his pay package sounds like a much better deal than Moynihan's.
Problem: Settlements over crummy mortgages keep eating at profits
Despite being forewarned about charges due to settlements of battles such as the $11 billion Fannie Mae put-back request dispute, investors seemed unimpressed by the deck-clearing that these settlements produced. This could be because there is still much uncertainty about how much more shareholders can expect to see regarding toxic mortgage issues, or it could another type of concern: earnings.
Though Moynihan has been insisting that his bank is planning a move back into the mortgage lending biz, investors must surely have felt glum when they saw how many more mortgages peers JPMorgan and Wells Fargo made last quarter. Plus, actually making that plan a reality is going to be tough considering the bank's still-weighty legacy loan issues, as well as the fact that its customer service track record in that regard is hardly stellar.
But as investors know, the Fed will want banks undergoing the stress tests to have some plan in place showing that future earnings will be hale and hearty. That, after all, may be the true reason investors have been withholding their enthusiasm thus far.
