BofA Running on Fumes

 | May 17, 2013 | 1:00 AM EDT
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Bank of America's (BAC) stock price has almost tripled since its near-death experience of breaking below $5 in December 2011. Although it stumbled a bit in mid-2012, for the most part it's been on a steady climb -- especially since the Federal Reserve announced its third and fourth rounds of quantitative easing last September and December, respectively. The general consensus among equity investors is that that the existential crisis has passed. The attitude of "that which does not kill you makes you stronger" has set in.

The concept of "too big to fail" (TBTF) has also certainly helped, boosting the confidence of traders and investors that the Fed and the U.S. Treasury will backstop BofA no matter what.

But, just as there is often a disconnect between economic fundamentals and market activity, the same is often true for the performance of a company's stock versus the company's actual financial and business performance.

In this column I'll consider BofA's stock price vs. the business and compare the company with its peers, JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C). Outside of market action, propelled largely by investors external to the company, BofA's internals are still poor -- and much more so than those other three money centers.

Even as BofA's stock price began to rebound in early 2012, many parts of the company's business and financial position continued to shrink or deteriorate; a process that is still ongoing. Since the stock price broke below $5 in 2011, the company's total assets have declined by about 1%, continuing the steadily negative trend of the past five years.

In contrast, total assets at Wells Fargo, JPMorgan and Citi have increased by about 10%, 7% and 1%, respectively -- and the stock prices for all three have roughly doubled in the same period. Tier 1 (core) capital has also declined from about $150 billion to $147 billion in the past two years. Total capital has declined from about $180 billion to $170 billion, and net equity capital has sunk from $209 billion to $206 billion.

The company is shrinking, and yet its annualized net operating income has increased from about $3.3 billion at the end of 2011 to $6.2 billion currently.

This growth, however, is almost exclusively due to the housing rebound of the last 12 months. As a result of this, the company has had the opportunity to resolve some of its non-performing-mortgage problems and sell some of the foreclosed properties it owns. That's a good thing, but at the same time BofA hasn't been able to capitalize on the creation of new revenue -- because the focus on problems has absorbed much of the company's employees time. That's bad.

Even with the company's attention on resolving balance-sheet problems, though, it is still far behind the other three money centers in doing so. For the past three years, the company has seen a steady rise in the value of non-performing loans as a percentage of all loans.

That's because, as quickly as BofA is now resolving its legacy issues, it is losing existing performing loans and business even more quickly. In fact, even as housing and mortgage activity has increased, the book of performing residential mortgages held and serviced by BofA has decreased by $18 billion since the end of 2011, from $282 billion to $269 billion. The company's previous dominant role in that business has passed to Wells Fargo, whose book of first trust residential mortgages has grown from $236 billion to $264 billion in the same period.

The bottom line is that Bank of America's stock price, and company viability, have been maintained by expectations that it is too big to fail and the "halo effect" from investors' belief that it too will eventually resolve its remaining legacy issues, as have Wells Fargo, JP Morgan, and Citigroup.

This may happen, but it may not. Right now BofA is also benefitting from the fact that JPMorgan and Citigroup are more focused on competing with each other for business outside of the U.S. rather than stateside.

This has left Wells Fargo in the politically uncomfortable position of being the only money center focused on the U.S. residential mortgage market. Although Wells has the ability to supplant Bank of America completely, essentially and actually taking over the entire residential mortgage market, the political blowback would be too big if that took place.

If JPMorgan or Citigroup were to focus their energies on that market, though, they -- together with Wells -- would have the political cover, by way of perceived market competition, to put BofA out of business.

I don't know if that will happen. But if the U.S. housing industry does not experience an imminent correction, and if BofA remains much slower than the others resolving its legacy issues, either JPMorgan or Citi will be left with almost no other option than to move aggressively into the current void in the market. It's actually a bit perplexing at this stage why one of them hasn't already done so.

For now, if I had to invest in the money centers, BofA would be my last choice.  

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