RBC analyst Joe Morford boosted his Bank of America (BAC) price target, but cut his EPS estimates after the company reported surprisingly strong Q2 earnings yesterday. Like almost everyone but Ken Lewis, BAC's CEO, Morford is worried the Countrywide deal will blow BAC's balance sheet to smithereens.
As for the strong Q2, Morford cited margin expansion, solid fee growth, and smaller asset write-downs:
The margin increased a better-than-expected 19 basis points sequentially to 2.92%, as BofA's liability-sensitive balance sheet benefited from lower funding costs. Given the steeper yield curve the margin ought to continue to improve gradually. In 2Q08 BofA booked losses of $645 million on CDOs (down from $1.47 billion in 1Q08), $263 million on CMBS (versus $191 million), and just $64 million on leveraged loans (versus $439 million).
But Morford is concerned about the acquisition of Countrywide, and is concerned that the deal will negatively effect BofA's capital position:
The Tier 1 capital ratio improved to 8.25% from 7.51%, after BofA raised $7 billion in preferred equity
in the quarter. While the company more than covered its $0.64 dividend, we remain cautious about future payments given the hit to capital levels from the July 1 acquisition of Countrywide Financial.
Morford reiterates his Sector Perform rating and raises his target to $26 from $22, citing the recent rally in bank stocks.
