J.P. Morgan Chase & Co. (NYSE: JPM) is the highest credit quality of the money center banks in America. Bank of America Corporation (NYSE: BAC) is not. Far from it. You have seen the persistent selling trend in Bank of America and it is not just in the stock. The preferred shares have come under pressure and its credit default swaps are passing the 2009 highs. So what happens when you see J.P.Morgan come out and defend Bank of America after the recent carnage? That is exactly what we have seen today from its North America Credit Research. The more safe bank is loosely defending the weaker bank with a research upgrade, but the prior “Underweight” rating is only being lifted to “Neutral” today.
Several features of perception against reality were cited. The stronger noted that BofA sentiment has grown increasingly negative in the past few weeks, an understatement considering the 40% decline in BofA’s stock price versus a 15% S&P price drop. It also noted an inversion of the credit default swap curve as well.
The report called it prudent for management to address concerns in the credit market. Further noted is that this equity and credit market pressure has hit a point that is increasingly hard for management to ignore. The report also noted that this could increase the chances of a credit-positive development, such as a capital raise.
It was back on April 18 when J.P. Morgan cut the rating on BofA to Underweight. At the time, the CDS spread was 137 basis points, but it was 445 basis points on last look. J.P. Morgan noted that Citigroup Inc. (NYSE: C) has a mere 170 basis point CDS at last look. Despite this, J.P.Morgan said that it no longer makes sense to remain at “Underweight” even with mortgage expenses there and while a relative capital shortfall remain. Earlier this month that capital shortfall was called $12 billion under a base case of Basel III, and the bear case suggested a $25 billion capital shortfall.
Rochedale’s Dick Bove has also defended Bank of America today, but where he differs with J.P. Morgan is that he thinks BofA can handily cover its liabilities. Bloomberg even has a video of this. Bizjournals.com has also run reports showing that Jefferies believes a new $50 billion is needed. The FDIC has also just freshly shown that sector-wide banking metrics are still improving.
Back to J.P.Morgan… The research this morning notes that asset sales and the possible settlement approvals and capital raising. J.P. Morgan has also gone on to say that the current challenges are solvable and said that the current valuations appear to reflect irrationality rather than reality in the issues at BofA.
Now, there is some housekeeping to address. There have been some loose and so far completely unfounded rumors out there that J.P. Morgan could actually somehow acquire BofA. The mere thought of this is so out of line with public sentiment and would require so many exceptions to banking law (the 10% deposit threshold is just the start) that this seems almost silly. In this crazy world, the one admission to make is that anything may technically be possible. In fact, aliens could arrive for an intergalactic media conference any day now.
If the regulators really think that BofA is healthier than the public perception and healthier than this stock is indicating, maybe they should just announce the approval for the bank to start paying a higher dividend. That is very unlikely today, but by the take of yours truly it is more possible than any J.P.Morgan-BofA rumors other than that the healthier bank has issued research defending the weaker money center bank.
Another rumor may be more of a philosophical discussion rather than a rumor, and it has been ongoing. Brian Moynihan has said how much he regrets his predecessor taking over Countrywide, and Countrywide is the source of 95% or more of today’s issues. The discussion now that should be taking place is how BofA could throw in the towel and bankrupt the unit. It would be a real mess, and frankly it may challenge many aspects of corporate and banking law.
Keep in mind that the prior book value of $12.65 per share that BofA reported last month is no longer relevant. What it is may just be a guess now, but the market has voted that the prior stated value is far lower after write downs and more. Bank of America shares are down 2% at $6.29 on the day. The triple-leveraged Direxion Daily Financial Bull 3X Shares (NYSE: FAS) has all of these and other big financial stocks in there as components and its shares are up 5% at $12.28 or so on last look.
JON C. OGG