Bank of America: A King Among Corpses

By Ian Wyatt, NewsletterAdvisors.com | BAC | Oct 13, 2008 | 1 comment

"The U.S. financial-services sector is undergoing the broadest restructuring of a single industry in the history of corporate America, and Bank of America has positioned itself to emerge as one of three clear frontrunners. Indeed, along with Citigroup Inc. (NYSE: C) and JPMorgan Chase & Co. (NYSE: JPM), Bank of America could well emerge from this financial maelstrom as one of the premier players on the global stage. All three will benefit from increased market share and increased financial intermediation margins as their weaker rivals have failed and/or been taken over in part or in total by a stronger industry player," says Marquez. 

The analyst adds that during the many global financial crises he has researched, the result has always been the same: the prudently managed, under-levered institutions that did not overstretch their capital bases and that were able to maintain strong funding not only survived - they ran away with the market.

Look no further for an example: Bank of America is currently benefiting from a conservative stance taken during normal economic times. As is often the case, when the economy turns down, or when the periodic financial crisis strikes, Bank of America is "among the few that actually [has] the capital available to cherry-pick the ‘crown jewel’ assets of [its] now-floundering rivals."

Because Bank of America has one of the largest deposit bases in the world, generating dependable income on a daily basis, even during the worst of times, it is in an enviable position.

Marquez offers these examples:

"On July 1, BofA snapped up the operations of dying mortgage leader Countrywide Financial. Bank of America ended up paying only about $2.5 billion in Bank of America stock in a deal that had actually been announced back on Jan. 11. Bank of America had actually already invested $2 billion for a 16% stake in Countrywide.

"Then, in a stunning turn of events back on Sept. 15, when investors were watching and waiting for Lehman Brothers Holdings Inc.’s possible acquisition by either Bank of America or Barclays PLC (ADR NYSE: BCS), BofA instead emerged from the weekend announcing that it had struck a deal with Merrill Lynch & Co. Realizing that the credit crisis had rendered moot the concept of the standalone investment bank, Merrill Lynch avoided Lehman’s ultimate fate - bankruptcy - agreeing to be bought out by Bank of America.

"BofA acquired Merrill Lynch in an all-stock transaction for a 70% premium over a very depressed Merrill Lynch stock price at about 1.83 times tangible book value, or about $50 billion, less than a third of its own market capitalization. What’s more, when the transaction closes (probably in the first quarter of 2009), Bank of America will jump to about $2.7 trillion in assets from $1.7 trillion in assets, retaining a strong capitalization ratio."

According to Marquez, Bank of America has now jumped from merely being one of the largest banks in the world to being a commercial-and-investment banking powerhouse, one of the first true heavyweights under this new industry model that’s emerged from the current credit crisis. 

"It will have a dominant presence - shared by very few - in such businesses as commercial banking, asset management and investment banking.  In these very uncertain times, size and strength count for a lot. Just in retail-brokerage and wealth-and-investment management the figures are staggering. The combined entities will have:

·     20,000 financial advisors, most of which are from Merrill Lynch.

·     $2.5 trillion in assets under management.

·     50% ownership in BlackRock Inc. (NYSE: BLK), which in turns manages assets worth $1.4 trillion, and the Columbia Management Group LLC fund family, with $425 billion in assets under management.

Marquez foresees Bank of America having a dominant presence on both U.S. coasts, a leadership position in 15 of the 20 fastest-growing states, and relationships with virtually all the leading companies in the United States and most leading companies in the world.

"All told, this combination will yield a company that has a very balanced business mix: global-consumer and small-business banking will still be the dominant segment, despite decreasing to 48% of the total, while global-wealth management and global corporate and investment banking will increase to 32% and 20% of total revenue, respectively," adds Marquez.

It’s not clear that all of the market’s downside is already factored into Bank of America’s shares. Still, trading around 55% below its 52-week high, Bank of America still has an awful lot of squirming room on the upside. The July 15 lows of $18.44 haven’t been re-visited.

"Go for BofA, but do it prudently," he says.

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Posted by fisnik  on  10/14  at  02:44 PM

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