Sunday, February 6, 2011
Good Bank Bad Bank (BAC)
After the markets closed on Friday, Bank of America announced the creation of a new department (mini-bad bank). This new department will handle some 1.3 million delinquent outstanding loans they have on the books from their Countrywide Financial mortgage unit. In Q4 of 2010, B of A took $2 billion non-cash charge against the value of those loans. Furthermore, they made a $4.1 billion provision to cover the potential buyback of certain mortgages and loans that government agencies and other investors bought from Countrywide. B of A could face even higher potential losses ($10 billion) should more mortgages made prior to the housing bust turn sour. However, as large as these numbers seem, B of A appears to be well covered. They have a whopping $500 billion in outstanding/performing mortgages and HELOC's ( home equity loans ) to cushion them against their non-performing loans. Credit trends are improving on both consumer and commercial loans. Charge-offs in both categories are falling - all pointing to improved earnings power ahead for B of A. The bank also noted on Friday, that they will discontinue their business of reverse mortgages to focus on more "critical areas" of their operation - another good move.
By having this new unit deal head-on with the "bad" loans and streamlining other less profitable operations, I expect the market to perceive these changes as positive going forward. With operating conditions improving and strengthening earnings power combined with improved perception by the street should bode well for shareholders. B of A is a good bank. I'll continue to add to BAC on weakness.
Disclosure: Long BAC, Long Green Bay Packers