Bank of America's Valuation and Industry Outlook: Expert Insights

Strategic Insights -

Bank of America, the largest consumer bank in the country, is navigating two critical challenges: its legacy mortgage exposure and the need to boost its consumer banking arm. Analysts are closely watching the bank's valuation, which has come down significantly, making it the cheapest bank in the coverage universe, with shares trading at five times next year's earnings. Credit Suisse analyst Moshe Orenbuch, a guest on Bloomberg's Surveillance, highlights the bank's cheap valuation and identifies potential opportunities in the sector. Meanwhile, the banking industry faces concerns about systemic risk and regulatory burdens, leading to layoffs and a need for cost rationalization.

Key Takeaways:

  • Bank of America's valuation is unusually low, trading at five times next year's earnings, with shares priced at half of tangible book value, a level last seen during the financial crisis.
  • The bank's legacy mortgage exposure is a significant concern, but analysts believe it may not be as costly as initially feared, with potential savings of tens of billions of dollars.
  • Moshe Orenbuch identifies Bank of America as the top banking pick, with a target price of $14.00, more than doubling the previous target of $17.00.
  • The largest banks are expected to lay off thousands of employees as they adjust to the slowing economy and increased regulatory requirements.
  • The banking sector's earnings have been impacted by concerns about systemic risk and the cost of mortgage regulations.
  • The rise in demand deposits, jumping by almost $100 billion in one week, is an overreaction and may not be sustained, while a permanent shift to cash hoarding could affect banks' bottom lines negatively.

Statistics:

  • Bank of America's shares trade at five times next year's earnings.
  • The bank's valuation has come down to half of tangible book value.
  • The top banks employ north of 200,000 people on average.
  • Only one of the top ten banks has seen a decline in headcount over the past year.
  • The U.S. Treasury rating downgrade led to bond prices rising and money flowing into banks, while the sector's stock prices were hammered.

Sources:

  • Tom Keene, Bloomberg Surveillance Host
  • Moshe Orenbuch, Analyst, Credit Suisse
  • Ellen Zentner, Executive Director-Fixed Income Trading, Nomura Securities
  • Bloomberg Transcript (Date: Not specified)