To say that the situation had become painful at Bank of America (NYSE: BAC) would be the understatement of the year. Shares were trading at $10.22 on July 21, before the meltdown started and shares closed out July at $9.70. This came to a drop of more than 15% for the month and a drop of 20% from the July 21 date. The only good news is that shares literally started challenging $6.00, so if you can imagine it, there has been a bounce of 35% from the extreme trough.
To say that BofA is similar to JPMorgan Chase (NYSE: JPM) is just a farce these days. BofA is arguably now in a worse spot than former DJIA component Citigroup (NYSE: C) and is still in a worse boat after the Warren Buffett investment than Buffett’s true favorite bank stock of Wells Fargo (NYSE: WFC). Still, BofA was in a much better light up until the mortgage issues started coming back to haunt the company.
While there are caveats on almost every issue, we have identified roughly ten items that could help BofA stock climb back up to $10.00 and then higher.
More on Mortgages … The first thing that Bank of America can do is to expedite the exit of the mortgage business. The recently announced plan to sell or wind down the mortgage lending business (announced on August 31) needs to be an expedited exit as it would seem that there would be very few buyers for an operation of this size in the current mortgage environment. Investors gave very little reward for this move and it seems a bit underappreciated. The bank included that this will create an exit from wholesale lending, as well as what had been an exit from reverse mortgages and Balboa Insurance. It may seem too soon to tell the bank to hurry up here, but this is addressed further in other areas below.
A Quarantine of Countrywide … BofA seems to go out of its way to avoid using the word Countrywide, despite the obvious mortgage mess that it took upon itself. Moving to sell or shutter the mortgage lending operation is one thing, but the bank needs to clearly show that it plans to quarantine the old Countrywide operation’s liabilities rather than holding on to them. While there were crazy rumors on BofA in August, the one that seemed the most credible was that BofA would seek a total reorganization, which would somehow quarantine the liabilities that were put on the books from Countrywide and Angelo Mozilo’s lending standards from 2005 to 2007. Is that a unit Chapter 11? Possibly, but using a court-assisted reorganization is not easy for a giant company to pull off for just one unit. The risk of enjoinment is always present and the ultimate method for BofA to further quarantine Countrywide is up to its attorneys. That “basement” acquisition will become textbook case study of error as this has added on many more times the liabilities. The cost paid for Countrywide is a drop in the bucket compared to the expenses the bank will have taken by the time all is said and done.
Continued Shrinkage … BofA has made some select branch closures and made some select layoffs of close to 3,500 workers. Wall St. and Main Street want a more focused BofA, and the bank will have around 284,000 employees after these cuts. The bank needs to better communicate that it is reviewing further cuts for say up to 5% of its least profitable operations and branches. This cannot occur overnight, but the bank can score a win here. The bank would argue that it is already accomplishing this via the recently announced mortgage unit exit. Bank of America’s website lists roughly 5,900 retail banking offices and approximately 18,000 ATMs. It has online banking with 29 million active users and supports about 4 million small business owners. The company also claims operations in more than 40 countries. A more focused strategic review would help here, but cuts do not exactly have to be assured. Imagine if the bank said, “We have completed a newer and more thorough review and have found very few operating locations that fall under our profitability threshold.”