Bank of America's Valuation Is Seen as Invitation for Activists

  • CLSA's Mike Mayo raises BofA shares to buy from sell
  • Sees `outside shot' demands will emerge for restructuring

Bank of America Corp. was raised to buy from sell by Mike Mayo, an analyst at CLSA Ltd., who said the company’s low valuation and “lousy” efficiency increase the chance shareholders will demand a spinoff or other type of restructuring.

The bank, whose shares dropped 20 percent this year through Thursday, trades as if it were struggling through a recession when the economy is actually expanding, Mayo said in a research note Friday. That gives investors a margin of safety, he wrote, adding that the firm’s parts are worth 40 percent more than its current market capitalization.

“The lower stock price is not just a more attractive entry point, but it also could be the catalyst for an event,” Mayo said in a telephone interview. “Calling Carl Icahn: look at the math.” Icahn is an activist investor who’s currently pressuring insurer American International Group Inc. to shrink and boost returns.

Bank of America Chief Executive Officer Brian Moynihan, in charge since 2010, has sold more than $60 billion in assets, boosted capital levels and reduced expenses while settling the biggest legal burden faced by any U.S. lender. Still, the January rout in financial stocks has left the company trading below tangible book value. That indicates investors either don’t believe the firm’s assets are worth what it says, or they doubt management’s ability to generate returns above the cost of capital, Mayo said.

Larry DiRita, a spokesman for the Charlotte, North Carolina-based bank, declined to comment on Mayo’s assessment.

Market Value

Bank of America’s market capitalization is $142.5 billion, which would make it difficult for any hedge fund to take a sizable stake. Regulators have ultimate control over whether banks can increase dividends and buybacks, another factor that makes them less attractive for activists. In past years, shareholder proposals to examine a breakup haven’t received much investor support. 

Shares of the company climbed 0.9 percent to $13.66 at 11:16 a.m. in New York. Mayo raised his price target to $16 from $15. The firm’s price-to-tangible-book ratio was 0.88.

“With the stock trading at a significant discount to tangible book value, the chance for an event increases -- whether it’s a restructuring, spinoff or some sort of other action to improve their lousy efficiency,” Mayo said. “Our view of management and governance hasn’t changed. Our view is that there’s additional heat on top management to grow revenues faster than expenses.”

In his note, Mayo wrote that “while an activist is an outside shot, increased shareholder pressure seems likely.” Bank of America’s efficiency ratio, which shows how much it costs to generate a dollar of revenue, is the worst of the biggest U.S. banks in the high 60 percent range, Mayo said.

The lender should “show they have economies of scale, or restructure, sell assets or break up,” Mayo said.

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