Bank of America must be hoping for a dose of Citi’s tonic

January 21, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bank of America boss Brian Moynihan had a tough first year in charge. The Charlotte-based bank was the lightning rod for all mortgage-related storms, took $12 billion of goodwill writedowns against businesses bought by Ken Lewis, the former chief executive, and is the probable target of a forthcoming WikiLeaks campaign to boot. After all that, Moynihan must be hoping that he is finally in line for a dose of rival Citigroup’s tonic.

Citi, BofA’s fellow double-dipper into the U.S. bailout fund, boasts the best-performing stock performance of the big American banks since the start of last year — it’s up almost 50 percent. BofA is the laggard, down more than 3 percent. Of course, Citi fell harder during the crisis. But its turnaround looked stronger. Citi also trades at a higher price-to-book value ratio, though at just 87 percent of book it still has a way to go.

Based on its fourth-quarter earnings report on Friday, things are looking up for BofA, which trades at about 72 percent of book value. Granted, the improvements are hard to spot in the headline loss of $1.2  billion for the period. But the bank reported such a smorgasbord of one-off charges and extraordinary gains — from tax breaks to asset sales to mortgage costs — that a certain amount of progress, albeit slow, was obscured.

Strip out all the one-off items and assume a 33 percent tax rate, and it looks as if BofA’s core businesses made $1.8 billion for the quarter. Admittedly that’s just a 4.6 percent return on equity — hardly stellar. And the worry remains that the bank will keep being hit by a variety of charges.

But BofA does appear to have drawn a line under its agency mortgage risk, at least. It no longer needs to sell businesses to appease regulators. And the goodwill writedowns appear aggressive enough to warrant no further action. Moreover, as the economy improves, the bank shouldn’t need to set aside as much for losses. Halving last quarter’s provisions, for example, would have pushed the return on equity, adjusted to exclude the one-offs, to almost 10 percent. That’s around what passes for healthy in the sector for now, with growth sluggish and regulators encouraging banks to hold extra capital.

BofA isn’t quite there yet, and challenges remain. But that didn’t stop shareholders giving Citi the benefit of the doubt last year. If Moynihan can convince his investors it has taken similar medicine, BofA’s stock could be poised for a 2011 recovery.

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