BofA's Expected Drop In Book Value & Goodwill Take Out $100 Billion Market Cap Status (BAC, C, JPM)

Banking, finance, and taxes

Published: July 18, 2011 12:21 pm

Bank of America Corporation (NYSE: BAC) is back to being the worst of the worst of the Dow Jones Industrial Average components. Shares broke under $10.00 on Friday for the first time since May of 2009 when the market was screaming higher. Nothing is working in the bank’s favor.

The bank’s settlement over its mortgage fiasco was supposed to be a major help. Supposed to be is about all shareholders can hang their hat on as shares are close to 15% lower now. The $8.5 billion settlement from June is effectively going to be recognized all at once in the earnings for the report this week pertaining to the Countrywide mortgage repurchase and servicing claims.

We expect a drop in book value from the $13.21 per share at the end of the quarter first quarter versus the 2010-end book value of $12.98 per share in its January report.

From 2009 to 2010, Bank of America cut its “Goodwill” down to $73.861 billion from $86.314 billion.

Citigroup Inc. (NYSE: C) was trading closer to a 20% discount to book value after earnings and J.P. Morgan Chase & Co. (NYSE: JPM) was trading at close to 0.9-times book value. Does BofA deserve the same discounts as these two? It seems not, but the real reading will be when we see the numbers.

If we simply take a near-15% drop in book value from last quarter based upon the settlement’s post-market reaction and then take a 25% discount to that new book value for an implied market price ‘acceptability’ level we get closer to $8.50 per share. The problem is that this is just straight line assumption and there is no way to know the bank has or has not done to sustain its book value outside of what it has forecast and what its peers have reported.

Ditto for “goodwill” on the balance sheet. Maybe Bank of America will be the first bank to record ‘ill-will’ in a report. That is how traders and investors are treating it.

BofA shares are down 4.2% at $9.58 in mid-day trading as investors are bailing out of the way ahead of earnings. Thomson Reuters is now looking for -$0.90 EPS on $12.34 billion in sales. The bank had previously said it wants to boost its dividend as soon as it is cleared to do so. Now that seems less and less possible.

JON C. OGG

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