Bank of America Bear Case Bigger After UBS Settlement, Morgan Stanley Says

When UBS reached an $885 million settlement with the Federal Housing Finance Agency for selling it bad loans back in July, it was greeted as good news for the Swiss banking giant. That settlement, however, might not be good news for Bank of America (BAC).

AP

That’s the opinion of Morgan Stanley analysts Betsy Graseck Grasek and Michael Cyprys Cyprus, who note in a report published today that their base case remains unchanged, but their worst-case hit has been pushed higher. They write:

Looks like UBS settled for total estimated lifetime losses on the underlying securities. As a result, some investors have been concerned about BAC's potential exposure given Moody's estimated lifetime losses on the securities are $10b. We think that's too high and model $2b in our base case. Lifetime loss estimates from Moody's were last published in 2011 and since then prices of super senior and senior tranches of the 2006-2007 securitizations are up an avg 33%. Also, simply applying lifetime loss estimates assumes that BAC is fully responsible for legacy Countrywide claims (an argument in which one judge in this case has already rejected and has dismissed successor liability claims against BAC). Just because UBS seems to have paid full lifetime loss estimates, doesn't mean others will pay the same.

The analysts now believe that the worst-case would be a 3.54 billion hit from its own bonds and $40 million for bonds sold by Countrywide, whom it acquired at the height of the financial crisis. They also have a “super bear case” of $7 billion, which would include losses on both its own and all of Countrywide bonds. Still, Graseck Grasek and Cyprys Cyprus believe the stocks looks cheap trading at 0.59 its price-to-2015 book value.

Shares of Bank of America have fallen 1.8% to $14.34 today, while JPMorgan Chase (JPM), which is facing a mortgage probe of its own, has dropped 2% to $53.07. Citigroup (C) has declined 2.2% to $50.48, while Goldman Sachs (GS) is off 1.8% at 160.44. The Financial Select Sector SPDR ETF (XLF) has fallen 1.7% to $20.02 today.