Credit Suisse (CS) downgraded its rating on Bank of America (BAC) to Neutral from Outperform because shares appear expensive to forward earnings when compared to other banking giants. Despite the recent good news surrounding BofA — settling with Fannie Mae, selling mortgage servicing rights — the bank is not expected to make enough profit to warrant an Outperform status.
At the current valuation, Bank of America’s shares are discounting at least a 16% improvement in costs over the next year compared to its estimated 10%.
The firm’s research analysts Moshe Orenbuch and Jill Glaser stated that the bank’s current market valuation is ahead of the company’s near-term to intermediate-term performance and is "discounting significantly faster improvements in efficiency" then expected.
Currently, the bank’s shares are trading at 11 times 2013 earnings compared to JPMorgan and Citi, trading at closer to 8.5 times.
"Despite the announced mortgage servicing sales, it will take until 2014 to see the annual run-rate of expense saves. Separately, we think it will be hard for Bank of America to grow revenues faster than the 'average” bank,' the report said.
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Credit Suisse rated the settlement deal of BofA with Fannie Mae as well as the sell of mortgage servicing rights as "positive." The deal is expected to alleviate expense pressure related to representation and warranty expense.
"We think that BAC could pursue additional sales of servicing assets given other interested buyers, and would not rule out other sales to the current buyers after they have had time to digest the current portfolio sales," the report stated.
The estimated portfolio shrinkage and the sale of servicing assets – including both performing and nonperforming assets – could equate to $5 billion on cost savings to BofA over time.
Thus, the bank will see the annual run-rate benefit of the most recent servicing assets sales in 2013 given the sales will occur in stages in 2013.
"Given the nature of the non-performing servicing assets, we think that the transfer of non-performing assets will come later in the transfer process, with the cost benefit seen thereafter," the report said.