by Jim Woods | April 28, 2010 6:32 am
The banking industry is in the hot seat these days, and on Tuesday Goldman Sachs (GS) executives were grilled by the Senate Banking Committee over fraud allegations against Goldman Sachs that claim GS stock leaders helped inflate the housing bubble—and then made billions of dollars when that bubble burst. The current Goldman woes are having a negative effect on the share prices of many banking stocks, including JPMorgan (JPM), Wells Fargo (WFC), Citibank (C) and Bank of America (BAC).
The Goldman hearings come as Congress and the Obama administration are pushing for beefed-up financial industry regulatory reform. So, with banks now in the Congressional crosshairs, is now a good time to buy stocks in this industry? The answer differs depending on which bank you’re talking about, but in the case of Bank of America, there are a number of good reasons investors should consider buying this stock.
1 – Outstanding BAC earnings. On April 16, BofA reported first-quarter earnings that easily bested analysts’ expectations. The company said it earned 28 cents per share in the quarter, way above consensus forecasts for earnings of just 9 cents per share. Although total revenues fell 10.6% year-over-year to $31.97 billion, that number was much higher than consensus forecasts for revenue of $27.97 billion consensus.
2 – Improving conditions in all Bank of America units. The outstanding first-quarter profit of $3.2 billion was BofA’s first venture into the black in three quarters. A big part of this profitability was strong investment banking numbers and operations inherited in its acquisition of securities firm Merrill Lynch. But the gains from Merrill weren’t the only areas of good news. Five of BofA’s six business units were profitable during the first quarter, and that means the company’s profit engine is nearly firing on all cylinders.
3 – Improving non-performing loans. The banks non-performing loans, leases and foreclosed properties were $35.9 billion, just slightly higher than the $35.7 billion in the fourth quarter. However, the provision for credit losses was $9.8 billion; $305 million lower than the fourth quarter. Also, consumer credit delinquencies seem to be on the mend. Among credit-card users, the number of loans at least 30 days late declined, and that allowed BofA’s credit-card unit to earn $952 million during the quarter. Credit quality across most commercial portfolios showed signs of improvement, and net charge-offs in the commercial portfolios declined across a broad range of borrowers and industries.
4 – Recent analyst upgrades of BAC stock. BofA recently received a slew of positives from analysts, including upwardly revised 2010 price targets. These increased price targets were largely the result of the healthy first-quarter numbers. Citibank lifted its 2010 price target to $26 from $23, and maintains a “Buy” rating on the shares. Barclays lifted its price target to $21 from $20 and maintained its “Equal Weight” rating on the shares, while UBS set a price target of $21 on the shares along with its “Buy” rating.
5 – Pullback means opportunity for investors. After BofA’s earnings report, the stock surged to new 52-week highs. However, with uncertainty over what the final financial reform legislation will look like, and with Goldman’s troubles souring the banking sector, BAC shares have pulled back sharply. But that pullback may actually represent a good buying opportunity in the shares, as the selling in BAC is likely due more to traders’ fears of the unknown, and not any inherent issues with the company.
Once these fears are fleshed out, and once Wall Street knows the lay of the land with respect to new bank regulations, it’s likely that traders will go back to the best-of-breed banks, and that means they’ll return to buying BAC.
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