Bank of America Gets Back to Normal

By Jack Hough 

Like a picnic besieged by yellow jackets, Bank of America's financial results this year have shown appetizing particulars that were nonetheless difficult for investors to fully enjoy.

The bank has slashed expenses, built a sturdy capital position, and gradually shifted away from volatile businesses toward stable and lucrative ones.

But it's also plagued by swarming litigation costs. They will sting again in the third quarter but then quickly begin to clear away. Starting next year, BofA investors will get a glimpse of two things they haven't seen in years: a fairly clean income statement and a decent dividend.

By 2017, earnings per share could hit $2, versus an estimated 75 cents this year. Shareholders by then will have seen a string of steady increases in earnings and dividends, with fewer and smaller legal surprises.

They could be willing to pay $25 a share by that point, or 12.5 times earnings, versus a recent $17. Add a buck per share in cumulative dividends and BofA stock could return 50% over the next three years, and perhaps sooner.

Bank of America is the second-largest U.S. bank by total assets, with $2.17 trillion versus $2.52 trillion for J.P. Morgan Chase. Few big banks have been hit harder by legal overhang from the global financial crisis than BofA, where litigation has gobbled up 30% of core profit since 2013, double the average for peers.

In August, BofA reached a $17 billion settlement with the Justice Department over mortgage lending, which will bring its total legal tab since the financial crisis to well over $65 billion. Look for another messy report in mid-October, when the bank releases third-quarter numbers.

The good news: BofA reckons it has resolved claims on 95% of mortgage securities where claims have been filed or threatened. Starting in the fourth quarter, profit statements could once again begin to be dominated by, well, profits.

"There's a lot of talk about when earnings will get back to normal," Chief Executive Brian Moynihan told Barron's recently. "But we're already seeing rising profit in most of our core businesses, offset by legacy costs."

In a note this month upgrading BofA shares to Buy from Neutral, Goldman Sachs pointed out that, looking beyond litigation costs and other one-time items, BofA has shown the largest reduction in earnings volatility among its peers in recent years, and the stablest trading revenues since 2013.

Better earnings stability and higher dividends have helped Wells Fargo, for example, fetch a premium stock valuation of 1.7 times this year's estimated book value, versus 0.8 times for BofA. As steadier earnings for the latter begin to shine through, its discount should narrow.

A bigger dividend should help. The Street predicts 55 cents a share by 2017, or 3.2% of today's price.

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