Morgan Stanley analyst Betsy Graseck downgraded Bank of America (BAC) to Equal Weight today on concern that the company will face extended risks from litigation, among other problems.
“Bank of America is cheap at 0.3 times price to book and 0.5 times price to tangible book. But catalysts to get to fair value have been pushed out to 2H12 or 2013 as risk is rising that 10 year and residential mortgage backed securities (RMBS) yields fall further while the key RMBS settlement case has been moved to Federal Court. Expect catalysts to re-emerge as settlement decision approaches, rate pressure fades and European deleveraging is further along. Stock likely to trade side-ways until BAC can grow earnings.”
A judge recently moved a court case over an $8.5 billion settlement dealing with the company’s RMBS to federal court, which will likely delay a resolution. Uncertainty — about litigation, asset sales, macro risks — is weighing on bank stocks, and a slower resolution can only hurt the shares.
“What�s working for bank stocks? Certainty. We worked with our strategy team (Adam Parker) to see what�s driving bank stock performance from a quantitative perspective. Low EPS variability (small dispersion in estimates) appears to be the most important factor in driving positive returns in bank stocks over the past 6 months, something BAC ranks last in.”
Certainly, Graseck’s thesis is solid and the bank may be trading sideways for quite some time, but the note’s timing wasn’t great: Bank of America is up 9.3% today after the European debt deal.
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