Ken Lewis told Maria Bartiromo yesterday that he’s happy to have made $4.2 billion in the first quarter.
Let’s hope he savors the moment. Our first read of the earnings was that it was a one-off (or a “Great White Wash,” in Meredith Whitney’s words), and analysts are sceptical as well.
FBR Analyst Paul Miller sees losses for the next two years. Here’s the summary to his latest report
We reiterate our Underperform rating on Bank of America and our $5
price target, equal to 0.5x tangible book value of $10.88. BAC expects
unemployment to peak below 10%. In contrast, we expect double-digit
unemployment and continued growth in net charge-offs until mid to late
2010. Given this economic outlook, we expect that BAC will not be
profitable in 2009 or 2010. Regardless of unemployment’s peak, we
believe BAC cannot sustain many more quarters with 25% growth in
losses. In 1Q09, BAC surprised to the upside due to $6.9 billion of
one-time items. Accordingly, BAC’s pre-provision, pretax earnings of
$18.8 billion easily exceeded $6.9 billion of provision expense, but
we question the sustainability of these strong revenues. However, we
continue to consider BAC’s tangible common equity of $69.6 billion
(3.1% of tangible assets) too low to support its $2.3 trillion balance
sheet. We reduce our 2009 operating EPS estimate to ($0.30) from
($0.20), and our 2010 estimate to ($0.50) from ($0.20).
Miller says it’s inevitable that shareholders will be diluted when the government converts its preferred stake to common. When will that happen? Probably once the spread between earnings power and net-charge offs is no longer big enough to pay the government is preferred dividend. In the chart below, the blue bar represents the company pre-provision, pre-tax earnings. The maroon bar represents charge-offs and the white bar represents the dividend owed to the government.