Bank of America Is Still a Sell After Mortgage Settlement (BAC)

At long last, Bank of America Corp (NYSE:BAC) has pretty much put legal liabilities stemming from the sale of dodgy mortgages behind it. Hey, if nothing else, at least BAC’s financial statements are going to get simpler.

shpg stock c stock bac stock market todayA New York state appeals court on Thursday gave the OK for BAC’s $8.5 billion settlement with mortgage securities investors, putting to bed the bank’s largest legal liability still outstanding from the financial crisis.

Coincidentally, on Thursday, we learned that the nation’s 31 biggest banks — including BAC — passed the latest phase of the Federal Reserve’s stress test.

Back to the court’s decision, it’s welcome news for BofA, as well as other banks with similar settlements still pending, such as JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C).

Although much of the enormous costs from banks’ legal liabilities have long been factored into their share prices, the market hates uncertainty, and the courts approval of this latest matter removes some of that uncertainty.

The results of the Fed’s latest stress test, however, are far more important to shareholders than than the settlement with investors in mortgage securities. Anything that hurts BAC’s ability to raise its dividend or buy back more shares at some point is bad for the stock.

Last spring, BAC had to shrink its capital plans after discovering an accounting error that resulted in it having less capital than previously thought. Shares haven’t made any net progress ever since.

BAC Has a Growth Problem

At the very least, getting these distractions out of the way should help Bank of America concentrate on banking, which is challenging enough as it is. In the most recent quarter, BofA missed Wall Street’s profit and revenue forecasts.

Bank of America may be the nation’s second biggest bank by assets after JPM, but it hasn’t figured out how to grow in the new regulatory landscape. It has kind of sworn off the kind of high-risk wheeling and dealing that got the sector into such trouble in the first place, but it hasn’t quite figured out what to replace that with.

Morgan Stanley (NYSE:MS), for example, decided to rely less on trading and gunslinging and more on wealth management, a strategy that has so far been resounding success.

The bottom line is that, despite the approval of the latest settlement and a passing grade on the stress test, BAC is still very much on the mend — and the market knows it.

Just look at the tale of the tape. BAC stock is off 9% for the year-to-date and 6% for the last 52 weeks. That performance lags its competitors and the broader market by a wide margin. Indeed, JPM, C and Wells Fargo & Co (NYSE:WFC) are up anywhere from 4% to 16% in the last year.

Having the court OK a multi-billion-dollar payout isn’t really the catalyst BAC is looking for. It needs to show signs of growth and give investors hope that it will be able to raise its dividend again in the near future. As much as last year’s dividend hike was a relief, it only went from a penny a quarter to five cents per share.

Apart from perhaps some shorter-term technical plays, there’s still no reason to put money into this name.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities. 

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