BofA Upgraded to Neutral - Analyst Blog

By Zacks Equity Research,

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We have upgraded our recommendation on Bank of America Corporation ( BAC ) to "Neutral" from "Underperform" based on BofA's improving credit quality and various initiatives undertaken to stabilize its balance sheet. Though BofA's fourth-quarter earnings missed the Zacks Consensus Estimate, sale of non-core assets and accounting gains made it possible for the company to remain profitable.

We believe that the recent outflow related to the foreclosure settlement will likely hamper the results in the upcoming quarters. Further, revenue headwinds and issues related to the regulatory changes will continue to impact its earnings. However, the company is poised to benefit from its large-scale operations and improving capital ratios.

In 2011, BofA launched a company-wide expense reduction initiative - Project New BAC - with a goal to bring down the expenses by $5 billion annually by 2014. Other than reducing the expenses; this initiative focuses on increasing revenue, strengthening risk control and making changes to allow better execution and customer service, while returning more value to shareholders.

Further, BofA has been realigning its balance sheet in accordance with the regulatory changes, thereby promising a good business intention. The company has been shedding its non-core assets to strengthen its capital position in order to reinstate dividend hike, meet the new international capital standards (Basel III), focus on corporate borrowers and the U.S. retail clients, as well as strengthen investment banking.

BofA is taking advantage of its large scale to add new products to its retail channel. Also, with strong underlying fundamentals, the company continues to post strong results in investment banking. We expect this trend to continue, offering a significant opportunity to leverage its retail franchise.

However, we remain concerned about BofA's elevated cost structure. Though operating expenses started declining in the fourth quarter due to the implementation of Project New BAC, we believe that as the company is in the process of addressing legacy issues and continues to invest in its franchise, operating expenses will remain elevated in the near term.

Recently, BofA reached an $11.8 billion settlement with 49 states and federal authorities over alleged abuses in foreclosure practices. The company, along with four other mortgage servicers - Wells Fargo & Co. ( WFC ), Citigroup Inc. ( C ), JPMorgan Chase & Co. ( JPM ) and Ally Financial, has reached a settlement worth $25 billion in total with the attorneys general from these states and several other regulatory agencies. This outflow is expected to hamper the company's near term results.

Additionally, low interest rate environment and lower hedge income, due to the new financial reform law, will continue to drag down BofA's net interest yield, at least through the first half of 2012.

Currently, BofA retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating.

BANK OF AMER CP ( BAC ): Free Stock Analysis Report
CITIGROUP INC ( C ): Free Stock Analysis Report
JPMORGAN CHASE ( JPM ): Free Stock Analysis Report
WELLS FARGO-NEW ( WFC ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: BAC , C , JPM , WFC

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