Goldman Sachs analyst Richard Ramsden has reinstated Goldman’s coverage of Bank of America (BAC) with a Buy rating and $40 price target. Ramsden thinks that BAC is attractive at current price levels due to its long-term earnings potential and his opinion that BAC will be able to avoid an equity raise:
Long term earnings power: BAC is growing pre-provision earnings while the rest of the industry shrinks (+2% yoy in 2Q vs. 8% for the industry). Net interest margin expansion has been the biggest driver, and while deposit pricing presents a risk, BAC is better positioned than most due to its ability to pay lower rates and a consumer flight to quality effect.
Near term capital options: Capital is thin and credit costs will remain a problem, but we believe Tier 1 ratios can be rebuilt from the current 7.5% level to the 8% target through earnings, preferred stock issuance, and partial monetization of the China Construction Bank stake. A common dividend cut provides a back-up plan if credit is worse than we forecast.
Ramsden insists that BAC’s pre-provision earnings remain solid compared with its peers. Also, Ramsden thinks BofA will benefit from deposit growth as the ongoing credit crunch forces a flight to quality:
Moreover, we view pre-provision operating profit as the best measure of franchise strength. BAC generated ~$11.0 billion of pre-provision earnings in 2Q08, up 2% versus a year ago, and compared to an 8% decline for the industry.
Longer-term, we expect BAC to emerge as a market share winner as a result of the crisis. In particular, deposits are benefiting from a flight to quality effect, while BAC is also likely to be presented with M&A opportunities as the deposit cap would not apply in government assisted transactions.
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