Bank of America and Citi Profit From European Inertia

Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) have been roundly criticized for missing the mortgage-loan revival boat, hanging back as rivals JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) have met demand head-on, to great effect.

Well, perhaps they've learned a lesson, because there is one new wave they are riding right along other opportunity-seekers: Offering capital to a strapped European commercial-lending market, whose own banks are in a holding pattern because of prior over-imbibing and new, stricter regulations.

Tons of need, few local players
According to Bloomberg, big U.S. banks have been strolling across the pond to check out the level of desperation and have liked what they have seen. In addition to B of A and Citi, JPMorgan, Wells, and Goldman Sachs (NYSE: GS  ) have all become active participants in this budding market and are likely to take advantage of the lucrative commercial mortgage-backed securities business that is springing from this surge of overseas lending, as well.

For banks, this is a golden opportunity. The article notes that the credit squeeze has enabled those with capital to make profits of 3.75 percentage points over and above benchmark rates for low-risk commercial loans, which shakes out to be around five times what banks were able to procure back in the salad days of 2007.

CMBS market coming back strong
This is good news for the commercial MBS market, which began a rebound late last year, and has improved substantially so far in 2013. Recently, the Wall Street Journal reported that January's $8.8 billion issuance of CMBSes beat that of $8.2 billion in January 2005, which held the previous record for the biggest gain over a year's time.

Investors' hunger for yield has spurred this rebound, and a healing real estate market has helped default rates drop, as well. Hedge funds and other money managers can't get enough of these beauties, as managers of funds like Saba Capital Management and Davidson Kempner Capital Management gleefully pile into the offerings.

Mortgage REITs are active participants, too. Starwood Property Trust (NYSE: STWD  ) recently agreed to purchased LNR Property LLC, which will give Starwood access to over $1 trillion of U.S. and European commercial debt slated to come due within five years.

The booming CMBS business is a real boon to all participants, but particularly to Bank of America -- which needs to prove to the Fed that it has new ways to bring in cash, and won't continue to depend upon nipping and tucking to pad its balance sheet. If deals like the recent 1.06 billion euro loan by B of A to German real estate heavyweight Gagfah SA are any indication, Bank of America may have found a sweet new source of revenue to show off to regulators. 

Bank of America's stock doubled in 2012. Will the lucrative CMBS market help to bring about another surge in value this year? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy, and as an added bonus, you'll receive a full year of FREE updates and expert guidance as key news breaks.


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10/24/2014 4:00 PM
BAC $16.72 Up +0.12 +0.72%
Bank of America CAPS Rating: ****
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Citigroup Inc CAPS Rating: ***
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