The Long View for Bank of America Corporation(BAC)
By Daniel at 26 June, 2009, 8:40 pm
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“The million-dollar question to me for the longer term is, what is the true earnings power of many of these companies? I don’t think the stock price reflects that earnings potential at this point,” he says.
Take Bank of America (BAC), now trading at 12 times the consensus earnings estimate for 2010 of $1.03 per share. However much damage the Merrill Lynch acquisition has done to the company’s reputation and valuation multiple, Kersting doesn’t believe the deal has hurt its long-term earnings potential. That’s in contrast to a stock such as Citigroup (C), whose ability to grow earnings once market conditions improve continues to be uncertain, he adds.
Anthony Polini, a banking analyst at Raymond James (RJF), sees Bank of America as one of three banks poised to benefit specifically from the slow-growth economy likely to prevail in 2010. Bank of America, JPMorgan Chase, and Wells Fargo together hold one-third of total consumer bank deposits in the U.S., he says. Slow economic growth will keep banks’ borrowing rates down, while capital constraints at many weaker banks will give Bank of America and the two other leaders pricing power to charge higher interest rates on new loans, he says. Bank of America earns 55% of its income from fees and only 45% from interest on loans, and that will also help. Polini expects the stock price to double in one year as the bank returns to a normal earnings level, and then triple in two years. Compare that with a 40% price appreciation per year that’s usually cause for celebration.
Many banks expect to benefit as lending that had migrated away from the banking industry to finance companies in recent years comes back to the banks, says Oja at S&P. He estimates that banks held $7.5 trillion in outstanding loans as of Mar. 31, just 20% of total outstanding credit in the U.S. If banks can boost that market share closer to 25% or 30%, it would mean big inflows in income and higher earnings, he predicts. But it’s hard to tell how much pent-up demand for commercial loans there is right now because of the state of the economy, he concedes.
Bogoslaw is a reporter for BusinessWeek’s Investing channel.
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