It's been a good year for shareholders of Bank of America (NYSE:BAC). Since the beginning of January, shares of the nation's second largest lender have nearly doubled, increasing by 83%. This makes it the top performing stock on the Dow Jones Industrial Average (DJINDICES:^DJI) by leaps and bounds, and helped the bank to blow away its too-big-to-fail competitors.
3 factors contributing to B of A's success in 2012
The first factor underlying its success this year has been the bank's ability to continue distancing itself from the financial crisis. To name only two examples, in February, and along with four other mortgage servicers, B of A entered into the so-called National Mortgage Settlement with 49 state attorneys general and the federal government to resolve claims that it "routinely signed foreclosure related documents outside the presence of a notary public and without really knowing whether the facts they contained were correct." For its part, B of A agreed to pay $3.24 billion in penalties to the federal and state governments and provide $8.58 billion in relief to borrowers. According to Brian Moynihan, B of A's CEO, these obligations will be fully satisfied by the end of this upcoming February.
Beyond this, B of A improved the optics on perhaps the biggest outstanding issue depressing its shares -- that is, the extent of future repurchase claims from the likes of Fannie Mae and Freddie Mac. Earlier in the year, I estimated that these could end up costing it anywhere between $4.7 billion and $40.9 billion -- the breadth of the range shows just how little we knew about the potential exposure. But after steadfastly refusing to provide its own estimate, B of A finally came forward with one. In its third-quarter conference call, the bank pegged its exposure at a comparatively reasonable $6 billion in excess of allocated reserves, leading me to predict at the end of October that the bank has finally turned the corner -- shares have since increased an additional 11%.
The second factor is that it's made considerable progress further paring down its noncore operations and transforming itself into a leaner and meaner lender from a regulatory perspective. Again, to name only two examples, in August, B of A sold its international wealth management business to Swiss bank Julius Baer for $882 million. And just this past week, it agreed to sell its stake in a Japanese private bank venture to Mitsubishi UFJ Financial Group for a purported $471 million -- Mitsubishi UFJ is the largest financial conglomerate in Japan and the world's second largest bank holding company. Taken together, in turn, moves like these are positioning B of A to cultivate its core customer base, consumers and businesses in the United States.
Finally, the third factor, albeit related to the second, is that B of A has dramatically improved its capital position throughout the year. As my colleague Amanda Alix noted at the beginning of November, the bank's third-quarter earnings report revealed that its Tier 1 capital ratio under Basel III rules stands at 8.97%, making it the best capitalized too-big-to-fail bank -- Citigroup's (NYSE:C) comes in at 8.6%, JPMorgan Chase's (NYSE:JPM) at 8.4%, and Wells Fargo's (NYSE:WFC) at 8.02%. Not to mention, global banking regulators recently signaled (link opens PDF) that B of A's burden to hold additional capital under the Basel III framework, known as the SIFI cushion, will be less stringent than it is for JPMorgan and Citigroup. Taken together, in turn, it seems highly likely that B of A will get the go-ahead from regulators sometime next year to raise its dividend, which, in turn, should serve as a further catalyst for share-price appreciation.
John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.