Goldman Sachs on $BAC
Benefitting from the Buffett blessing; remain Buy rated 1
Today Bank of America announced that Berkshire Hathaway will invest in $5 billion of cumulative preferred
stock. We believe today’s investment was less about building capital and more about instilling confidence in
BAC’s stock, as the transaction provides only a minimal common capital benefit today. While this should help improve sentiment for the stock, several key overhangs still remain including the servicing settlement,
concerns over its put-back settlement and mortgage litigation risk, and macro uncertainty. While sizing these
can prove to be challenging, the market appears to be pricing in an overly adverse outcome or a massively
dilutive capital raise, neither of which we believe will happen. Even if losses related to these come out on the
high end of our expectations, we believe BAC can absorb $40 bn of losses over the next few quarters and
still have a 6% Basel III capital ratio at 4Q12.
We continue to believe BAC will take further actions to pursue non-dilutive forms of raising capital, including
selling non-core assets (similar to its international card sale) and disposing of part of its CCB stake. These
should continue to help calm market fears over the strength of its capital base.
Implications
We reiterate our Buy rating, as we continue to believe the market is overly discounting a more adverse
outcome than we foresee playing out. Additionally, we have revised our 2011 and 2012 EPS estimates from
($0.25) and $1.25, respectively, to ($0.26) and $1.20 in order to reflect Berkshire Hathaway’s $5bn
investment.
Valuation
Our 12-month price target remains $10 and is based on 8.3X our 2012 EPS estimate of $1.20.
Key risks
Key risks include housing, regulation, and further mortgage put-backs.
stock. We believe today’s investment was less about building capital and more about instilling confidence in
BAC’s stock, as the transaction provides only a minimal common capital benefit today. While this should help improve sentiment for the stock, several key overhangs still remain including the servicing settlement,
concerns over its put-back settlement and mortgage litigation risk, and macro uncertainty. While sizing these
can prove to be challenging, the market appears to be pricing in an overly adverse outcome or a massively
dilutive capital raise, neither of which we believe will happen. Even if losses related to these come out on the
high end of our expectations, we believe BAC can absorb $40 bn of losses over the next few quarters and
still have a 6% Basel III capital ratio at 4Q12.
We continue to believe BAC will take further actions to pursue non-dilutive forms of raising capital, including
selling non-core assets (similar to its international card sale) and disposing of part of its CCB stake. These
should continue to help calm market fears over the strength of its capital base.
Implications
We reiterate our Buy rating, as we continue to believe the market is overly discounting a more adverse
outcome than we foresee playing out. Additionally, we have revised our 2011 and 2012 EPS estimates from
($0.25) and $1.25, respectively, to ($0.26) and $1.20 in order to reflect Berkshire Hathaway’s $5bn
investment.
Valuation
Our 12-month price target remains $10 and is based on 8.3X our 2012 EPS estimate of $1.20.
Key risks
Key risks include housing, regulation, and further mortgage put-backs.
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