After years of expensive litigation and settlement issues
related to its acquisition of Merrill Lynch and Countrywide,
BofA shelled out another $6 billion in litigation expenses in Q1
Though BofA made headlines again recently as the DOJ is
battling the bank's $12 billion settlement offer to end the
DOJ's probe into its mortgage practices, the bank has
indeed made great progress in resolving most of its
mortgage-related legacy issues over the last three years.
Once the DOJ settlement is off the table, Bank of America
will be able to focus on growth and divert more cash to
BofA should further experience significant earnings tailwinds
from a cyclical turnaround in its CRES unit. BofA's Consumer
Real Estate business was hit hard by the downturn in the
housing market as well as ongoing litigation which caused a
whopping $5 billion loss in Q1 2014.
Strength in the housing market and momentum in mortgage
originations, however, should benefit BofA's highly business-
cycle sensitive real estate business which could see
normalized profits of $1-2 billion a year going forward.
Another key theme that could be instrumental in pushing
BofA's dividends is interrelated to the other two themes and
relates to BofA's improving asset quality.
The underlying credit quality of loans and mortgages
improved dramatically after the recession as the bank
devoted large amounts of resources to working through its
BofA's credit trends have shown consistently lower net-
charge offs and provision expenses. BofA's Q1 2014 net
charge-off ratio, for instance, stood at only 0.62%.
Should those trends continue into the recovery, which is likely,
BofA will experience significant relief on the cost side of the
business and be able to benefit from mean-reverting
BofA should be able to increase its dividend yield from 0.26%
now to the 2-3% range driven by normalizing litigation
expenses, higher earnings in the real estate division and
improving asset quality.
BofA has a reasonable chance to earn about $13-15 billion a
year in normalized earnings.
If the bank decides to pay out about 1/3 of those earnings to
shareholders, investors would be able to pocket a dividend
yield of somewhere around 2.5% which is a much more
competitive yield and light years away from the current