The rise in short activity in Bank of America shares is consistent with the stock's performance over the past month. Bank of America shares have lost 11%, while the other three U.S. banking giants have all seen their stock prices drop by less than 3%.
A significant reason for the negativity around Bank of America appears to be management comments regarding lost revenues from so-called interchange fees--which banks charge to retailers for every debit card transaction. Bank of America said new legislation that caps those fees will cause it to take a $7 to $10 billion goodwill impairment charge in the third quarter and are likely to reduce revenues by $1.8 to $2.3 billion annually.
-We think average earning assets will continue to shrink as the company reduces its Holdings portfolio and its loan book shrinks. A higher net interest margin should help net interest income rise in 2010, but a flattening yield curve and lower loan balances will likely reduce net interest income in 2011.We expect an improvement in trading and principal investment revenues will more than compensate for lower card and banking fee income due to new regulations, helping revenues climb about 15% in 2010 before declining in 2011.
-We think a moderation in credit losses will allow C to reduce loan loss provisions significantly in 2010, although chargeoffs will likely remain elevated. Expense discipline should allow for significant pretax margin expansion during the year, and operating costs should settle at near 50% of revenues in 2011.
- Acknowledging limited earnings visibility and regulatory uncertainties, we think the company can achieve EPS of $0.46 in 2010 and $0.47 in 2011.
-C has restructured its business into Citicorp and Citi Holdings, with Citi Holdings carrying mostly non-core and distressed assets. The plan is ultimately to unwind Citi Holdings, which should lead to a more stable revenue stream. Tangible capital levels now seem adequate to us, but credit losses on loans held will likely remain elevated throughout 2010, in our view. The success of C's loan modifications will likely determine whether chargeoffs escalate from current levels.We think that dilution and asset shrinkage will prevent C from regaining the earnings power it once had. Still, with the shares trading at a discount-to-peers valuation, we see rising long-term value in the franchise.
- Risks to our recommendation and target price include a worse-than-expected downturn in global economic conditions, greaterthan- expected credit losses, and an inability to execute C's business plan.
- Our 12-month target price of $5.50 is equal to roughly 1.0X projected book value, below C's historical average and peers, reflecting market uncertainties.
EL-ERIAN: You know, Tom, all this speaks to what Ben Bernanke coined last week as the unusually uncertain outlook. Whether you look at the data, which is pointing in all sorts of directions, whether you look at the earnings, what we’re getting right now is very, very noisy picture. And it points to an uncertain outlook. Now, there’s two ways to think about this. One is, as you mentioned, certain data of backward looking, others are forward looking. The other thing – way to think about it is the reality that during regime shifts, data gets very noisy because you’re shifting from one regime to another and our inclination is the latter. Our inclination is to think of this as natural for a regime shift and we’re moving from a regime of high growth, leveraging, debt and credit entitlement to a more delivered, slower-growing, higher unemployment world.