Amidst a continued tumultuous environment for Bank of America (NYSE: BAC), speculation of rating cuts and continued loan losses have plagued the firm, sagged the earnings and weighed down it’s stock price. Research analyst David George is the latest to add to this concern, publishing his research out of Robert W. Baird, where he has downgraded Bank of America.
George stated that he is concerned the bank won’t maintain strong earnings after it finishes divesting assets to maintain capital requirements. Investor sentiment in bank stocks has turned quickly, after being in the doldrums for nearly 3 years, the sector has risen substantially since December of 2011. This shift in psyche has created a meaningful move in Bank of America, with shares shifting upward by over 75%. The bank also recently passed the Federal Reserve’s recent round of stress tests, while rivals like Citigroup (NYSE: C) failed to. Although the momentum seems positive, the research analyst doesn’t feel that strength can be maintained.
He downgraded BofA to “neutral” from “outperform,” however did increase the price target to $10 from $9. George also raised his 2012 earnings estimate on the bank to 65 cents a share from 50 cents, seeing a good first quarter, but lowered it for 2013 to $1.10 a share from $1.20 because of his concerns on earnings next year.
Although today’s news is negative, we are reminded that things could have been far worse for the firm. Just three months ago, analysts were questioning if the bank would have enough liquidity and capital to survive Dodd-Frank, Basel 3, and other rules mandating minimum capital requirements for banks. As it turns out, that fear was incorrect – although the stock was trading at just $5 a share, it was capable of passing the stress tests and holds a sufficient liquidity position. At the recent price trajectory of $10 a share, capital becomes less of a concern, and earnings power starts to take more of the focus.
The recent stock market rally has been largely fueled by the positives coming out of the banking industry – removing the uncertainty around stress tests and bank viability, investors have begun flooding back into the market, pushing stock prices up in the process. While Bank of America is in a far stronger position than they were at this time last year, the future path remains challenging – investors may favor sector competitors like JPMorgan Chase (NYSE: JPM), whose greater capital position, earning power, and dividend plans make for a more attractive combination than their Charlotte based rival.