We are maintaining our long-term 'Neutral' recommendation on
Bank of America Corporation
) to reflect the company's improving credit quality and various
restructuring measures undertaken. Yet, we expect revenue
headwinds, incessant litigations and various issues related to
the regulatory changes to continue to impact the near-term
BANK OF AMER CP (BAC): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
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Further, BofA reported break-even third quarter earnings compared
with Zacks Consensus Estimate loss. Results benefited from
substantially lower provision for credit losses and almost stable
operating expenses. On the flip side was the lower top line.
Management remains focused on managing capital levels
efficiently. To remain afloat, BofA has been trying to realign
its balance sheet in accordance with the regulatory changes post
the meltdown. In fact, over the last two years, BofA has
completed the divestiture/closure of more than 20 non-core assets
to strengthen its capital position so that it can focus on its
Moreover, BofA has made considerable progress in strengthening
its balance sheet, which reflects in its improved capital ratios
and successful clearance of the stress test in March 2012. Now,
we anticipate that the company would aspire for dividend hike and
share repurchase next year, when it will submit new capital plan
for the next round of stress test.
Last year, BofA launched a company-wide expense reduction
initiative - Project New BAC - with the goal of bringing down the
expenses. The implementation of Phase 1 of the program began in
October 2011 with an aim to reduce costs by approximately $5
billion per year by 2014. With the completion of Phase 2, the
company expects a total of $8 billion in annualized cost savings
by mid-2015 from this initiative.
However, we remain concerned about BofA's elevated cost
structure. Though operating expenses started declining in the
recent quarters 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. In June 2012,
Moody's Investor Services, the rating arm of
), downgraded the company's ratings by a notch on the back of a
weak economic environment.
In addition, the financial reform law is expected to have a
lingering effect on BofA's profitability, resulting in higher
costs, fee reductions and restrictions. In the mid term,
stringent capital requirement is expected to somewhat reduce the
company's flexibility with respect to its business investments.
BofA currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating.