With Meredith Whitney Defending BofA, Is It Time To Buy?

Meredith Whitney, who has been notoriously bearish on the banks in the past, is singing a different tune this morning. Whitney, of Meredith Whitney Advisory Group, said that Bank of America Corp. BAC does not have to raise capital immediately. In comments captured by Bloomberg, Whitney said, “I don't think that there's a mad dash to raise capital immediately.” Whitney was on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt and said, “They're going to steadily raise capital over time.” Whitney also defended CEO Brian Moynihan, saying he is “the right guy for the job.” Whitney said that the Charlotte-based bank would probably not need to raise capital in the public markets, and shareholders should “hold on.” This is a stark contrast from how the public markets feel. Shares of Bank of America, despite being up over 6% today, has lost almost half of its value since the start of the year. The sharp drop in shares have caused hedge fund titans such as John Paulson to drop his holdings in Bank of America. It also led to a conference call with Bruce Berkowitz, of Fairholme Funds acting as the liaison between investors and the bank. Bank of America has raised significant capital since Moynihan took over last year, selling 20 assets or units since he took over. “They're biting into the marrow of the institution to raise capital,” Whitney said. “They're selling some crown jewels.” The company is currently in preliminary talks to sell its stake in China Construction Bank Corp. Some investors had been hoping the company would sell its entire 10% stake in the company to raise capital, but that would be destructive to the company. It would be selling good assets to fund bad assets, and that is a business practice Moynihan does not seem interested in engaging in. Rochdale Securities analyst Richard Bove said yesterday to Bloomberg that Bank of America has sufficient capital. "I don't see any reason why [Bank of America] is going to have to raise additional capital in the open market if there are no huge losses. If you look at the 28 analysts who make estimates on this company, I'm not aware of any one of them that is arguing that this bank is going to show a loss either next quarter, the quarter after that, or in 2012. If you shrink the balance sheet the way they are, and if you continue to show a profit the way they are, then there's no reason for the bank to have to go out and raise any capital whatsoever," Bove said. Book value is around $16 per share, and banks generally trade around one times book. That would be more than a double from current levels. There are tons of concerns about the mortgage settlements that Bank of America will have to do may ultimately cripple it, with Countrywide continuing to weigh on it. Despite all of the concerns, Anthony Polini, of Raymond James said that Bank of America can pay down all of its short term debt, and "fund itself for another two years without raising a nickel." It has $15-$20 billion in excess reserves, so capital is not a worry. It may be time to look at Bank of America, given all the support, both from the bears, and bulls on this one. Bank of America could be the "bank of opportunity" for your portfolio. ACTION ITEMS:

Bullish:
Traders who believe that Bank of America is over capitalized might want to consider the following trades:

• Go long the preferred shares of BofA. They yield roughly 11%, and are more senior to common stock, should something happen.

• Investors who believe the company does not need to raise capital can also go long the common stock, if they believe the analysts.

Bearish:
Traders who believe that Bank of America will need to raise capital may consider alternate positions:

• Short BofA, as well as other banks, which are likely to get hit on the capital raise. J.P. Morgan JPM and Citigroup C are two other names that come to mind.
  
  

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