DESPITE Wall Street being in a state of uncertainty at the end of 2008, Bank of America Corp (NYSE: BAC) seemed to have risen above all the adversity, ringing in 2009 on a high note as it finalised its acquisition of Merrill Lynch & Co on New Year’s Day 2009. However, the blockbuster deal quickly turned sour as regulators investigated the details of the acquisition, inciting a scandal that haunted the bank for the remainder of the year. But as 2009 has ended, so have many of the concerns which impeded BAC throughout the year, paving the way for a more optimistic and bullish outlook for the stock in 2010.

One of the most notable differences between BAC’s position in 2010 versus 2009 is with respect to the US government’s Troubled Asset Relief Program (TARP). Having borrowed US$45 billion in bailout funds from the US Treasury Department last year, BAC was subject to US government-imposed rules and restrictions, which limited its actions on important decisions such as executive compensation. However, on December 9, 2009 BAC announced that it was able to completely repay taxpayers’ funds via a combination of cash and the US$19.29 billion it raised from the sale of convertible securities. The move set the company free from government intervention, which had been its Achilles heel, stifling its quest to find a replacement chief executive officer (CEO).

Just one week later BAC was able to close the deal, securing a new CEO to replace the 40-year veteran of the firm, Ken Lewis. The bank named the former head of its consumer banking division, Brian Moynihan, as its new chief, a decision many hailed as a positive opportunity for BAC. Being an internal candidate, Moynihan is already knowledgeable of BAC’s operations, thereby creating the advantage for a smooth transition and better enabling the new leader to immediately delve into the BAC’s core problems. One such issue is the bank’s ongoing investigation by the US Securities Exchange Commission (SEC) about its Merrill Lynch & Co acquisition. With the SEC broadening its charges against the bank yesterday, Moynihan is fired up to finally bring an end to these legal troubles as he leads talks with the US regulator. Additionally, the new chief’s spirit of change is also reflected in his first management shake-up which may see chief risk officer, Gregory Curl face a possible demotion as the CEO assembles his leadership team.

While BAC executives seemed to have nabbed the right man, the search for a replacement wasn’t a walk in the park. The bank was unable to find an appropriate successor as many were scared off by the government scrutiny they would have to endure if they accepted the job. As a result, this fostered months of speculation and uncertainty, inciting investor fear and distracting BAC executives from focusing on growing the bank’s earnings. Now, with the government restrictions subdued, BAC is ideally positioned to grow its book value, as well as restore shareholder and employee confidence.

As expected, BAC received its first major stock upgrade after it repaid its TARP funds by analysts at Credit Suisse Group AG (NYSE: CS) last week Thursday, January 7, 2009. CS lifted its investment rating on BAC to “outperform” from its previous rating of “neutral”, citing that its repayment of bailout funds “relieves a significant overhang on the shares”. CS also raised its target price for BAC to US$21, up from US$17. Since it repaid its TARP loan, BAC has risen 9.86 per cent to US$16.78 (January 11, 2010), up from US$15.41. Even more impressively, the stock has skyrocketed 12.42 per cent since the start of 2010. Having repaid its TARP funds BAC is better positioned than some of its rivals, namely Citigroup Inc, in which the US government still owns a 34 per cent stake.

However, while BAC’s improved position has spurred a rally there are still some fundamental issues which could make the journey a little bumpy. Being one of the largest consumer lenders in the US, BAC has to contend with falling consumer credit. In a report released last week by the US Federal Reserve, consumer credit decreased at a seasonally adjusted rate of 8.5 per cent or US$17.5 billion to US$4.47 trillion in November — its biggest tumble since the Fed began to records in 1943. Additionally, revolving debt such as credit cards fell by US$13.7 billion to US$874 billion, a record 14 consecutive decline.

Nonetheless, the silver lining lies in the fact that consumer spending, which accounts for approximately two-thirds of US gross domestic product (GDP), rose for the second straight month in November following an increase in personal incomes. Consumer spending climbed 0.5 per cent in November from a downwardly revised 0.6 per cent in October, just missing analysts’ estimates for a rise of 0.6 per cent. The rise in consumer spending compared with the fall-off in consumer credit, indicates that overall confidence is still low as consumers are still willing to spend but prefer to do so from savings, and banks continue to implement stringent lending policies.

Furthermore, as one of the largest determinants of consumer and business confidence — the unemployment rate — begins to stabilise, the US economy is poised to see a rebound in confidence in the upcoming months. In fact, the US unemployment rate remained at 10 per cent in December having lost 85,000 jobs in the month. Additionally, November’s payroll was upwardly revised to show that the job market added 4,000 jobs instead of losing 11,000 as was previously estimated — its first monthly increase in almost two years.

Additionally, as BAC awaits a pickup in its Global Card Services division, the Bank’s diversified revenue streams have helped to counteract the losses incurred due to rising loan defaults. For its third quarter ended September 30, 2009, BAC’s loss of US$0.26 per share was partially offset by profits from its investment banking and Merrill Lynch & Co operations, which included gains from bonds, stock and currency trading. As provisions for credit losses begin to ease, analysts are predicting that earnings for financial companies will more than double in the fourth quarter. Even though it was the hardest hit last year, BAC is forecasted to lead the gains when compared to its peers. However, only time will tell as BAC releases its fourth-quarter results on January 20, 2010.

Juvenne Yee is a Research Analyst at Stocks & Securities Ltd. You can contact her at jyee@sslinvest.com.