Tuesday, January 4, 2011

Bank of America's (NYSE:BAC) EPS Estimates Lowered on GSE Deal

FBR Capital likes the eventual positive related to Bank of America's (NYSE:BAC) deal with the GSEs to settle claims, but also see it having some short-term effect on their EPS.

FBR analyst says, "Before the market opened on January 3, 2010, BAC announced an agreement with the GSEs to settle a significant portion of their outstanding repurchase and warranties claims against the company. BAC will take a $2.8B provision as a result of the agreement. This agreement lifts a giant headwind for BAC stock and, therefore, we reiterate our rating and maintain our $18 price target. We also slightly adjust our 4Q10E EPS to $0.24, from $0.30, and our FY10E EPS to $1.07, from $1.14, to take into account elevated losses from the GSE agreement. If we include the $2.7B of claims in the estimated pipeline, total losses from rep and warranties claims from the GSEs would be close to $9B, or slightly above our high-end estimate of $8B. Although the total estimated losses from the GSEs were slightly higher than our initial expectations, we believe the agreement removes the "doomsday scenario" for many investors from GSE claims. However, the agreement does not touch the private-label liabilities, and we would very much encourage BAC's management to seek out a settlement with private-label litigants; but we realize that there are many different players involved in the private-label lawsuits and that it will take a longer time to settle these liabilities."

FBR maintains their "Outperform" on Bank of America, which was trading at $14.10, down $0.09, or 0.60 percent, as of 12:23 PM EST. They have a price target of $18 on them.

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