Bank of America looks ugly, yes, but when does it get to be too cheap to pass up?That’s the question analysts and investors have been asking since October, when it finally sunk in that housing-related legal challenges were likely to cost tens of billions of dollars and that Bank of America appeared to be on the hook for most of it as a result of its acquisition of Countrywide Financial in 2008.
Countrywide was one of the most aggressive actors out there when it came to making home loans that were unlikely to be repaid. The lender appears to have ramped up its mortgage operation just as the housing market was at its frothiest. Countrywide was the top U.S. mortgage originator with $463 billion in 2006, followed by Wells Fargo at $398 billion, with JPMorgan Chase a distant third at $173 billion, according to data from trade publication Inside Mortgage Finance that Countrywide cited in its 2007 10-K.
In 2007, however, Wells Fargo cut its originations way back to $272 billion. That was still good for second place, but well behind Countrywide’s $408 billion in originations. Also worth noting is that Bank of America’s own mortgage unit, which wasn’t among the top five originators in 2006, showed up at No. 4 in 2007 with $190 billion in originations. Add that to the $408 billion from Countrywide and you get nearly $600 billion in mortgages originated in the last year of the housing bubble.
Look at the last three years of the housing boom and the picture may be even starker. From 2005-2008, Bank of America sold more than $2 trillion in residential mortgage loans–$1.12 trillion of which were backed by government sponsored entities Fannie Mae and Freddie Mac and another $963 billion of which were guaranteed by private entities in what are known as “private label” deals, according to Deutsche Bank research.
By contrast, Wells Fargo, the second most active residential lender, sold about $715 billion worth of home loans during that same period, and the numbers drop steeply from there. Citigroup, the fourth-largest lender from 2005-2008, originated some $338 billion worth of home loans.
Given those numbers, it may be less surprising to learn that Deutsche Bank estimates $13.815 billion in remaining hits for Bank of America, which has already written down or reserved against $13.971 billion in losses. Compare that to JPMorgan, which has $9.362 billion in exposure, $9.153 billion of it already written down or covered by reserves. Bank of America’s remaining exposure is larger than that of JPMorgan, Wells Fargo, Citigroup, First Horizon National Corp., PNC Financial and SunTrust Banks combined, Deutsche Bank’s report states.
Despite this considerable headache, which doesn’t even take into account Bank of America’s mortgage servicing business and attendant issues such as “robo-signing,” a practice by which middle managers falsely claimed to have personally reviewed the details of far more foreclosures cases than they could possibly have done, Bank of America has plenty of viable businesses. Long a powerhouse as a retail bank, B of A’s acquisition of Merrill Lynch at the start of 2009 made it into a viable investment banking franchise. The bank’s fixed income and equities trading operations are competitive and occasionally better than those of rivals like Citigroup and JPMorgan, according to Deutsche Bank’s research.
And yet Bank of America trades considerably cheaper than rivals by many metrics. At 80% of tangible book value at the end of the first quarter, Bank of America shares are on par with those of Citigroup and a marked contrast to JPMorgan Chase, which traded at 1.4 times tangible book value. Over the past 20 years, B of A’s average price to tangible book value is 2.7–well above Citigroup’s historical average of 1.1% and JPMorgan’s 2.1% historical ratio.
Bank of America shares have had a dismal 2011, losing 18.82%
So what’s your call? Can the bank turn things around in 2011?
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