For Bank Of America, $34Billion, what $34Billion?

Bank Of America (BAC) has been surging the last few days, up 56% the last 5 days, despite leaked information from the Federal Government Stress Test results. Even though the leaked details of BAC's capital needs seem ludicrously high, the number could have been a lot worse. Analysts have been on BAC's high horse, upgrading the stock, despite the need for $34Billion in capital! And here's why.

Despite the fact that $34Billion seems high, you've got to remember this is Wall Street thinking. The same Wall Street thinking that applauded a government move to secure defaults on over $300Billion in debt of Citigroup (C). Both banks have been surging lately as Investors jump back into an industry that was decimated by the credit crunch losses and prolonged recession.

For Bank Of America, and several other banks requiring more capital, the easiest thing to do would be to convert preferred shares into common equity. In BAC's case, doing so would add approximately $28Billion in capital, according to an analyst from Morgan Stanley. The comprehensive analyst report from Morgan's Betsy Graseck details other potential asset sales that would raise the remainder of the required capital. All in all, a situation for BAC, that looks much brighter compared to several weeks ago. It was very recently that Goldman Sachs (GS) made a splash by raising $5Billion in a stock offering, in order to use the money to repay the government's TARP funds.

Ken Lewis having his role of Chairman and CEO separated has given shareholders a new life, and recent gains certainly helped cement realistic rebound expectations. All this, despite the the financial sector still on what can be described as slightly thicker ice.

What Investors are still most weary of is government control of the financial sector, and despite the new Administrations repeated denials of Nationalization the potential of having the US government as the largest shareholder of several major banks will do nothing to quell the argument.

For now though, When the Stress Test results are made public investors will await word of what exactly Bank Of America will do to raise capital. Till then, what $34Billion?

Disclosure: Author owns C, GS

Markets Drift Monday as Bank Of America disappoints

Earnings at Bank Of America (BAC) were lower than expected but on the bright side the company said it plans no dividend cuts. A positive for investors who are looking at a 7% yield at this point, but the markets have heard this before (Link).

Net Income fell 77%, the company set aside $6Billion for loan losses, but nonetheless still made $1.2Billion during the quarter. That amounts to $0.23/share on revenue of over $17Billion. While the profit numbers were lower than the Street expected, there is some good news in the fact that the company isn't heavy in the red like some of its larger banking rivals.

The Dow Jones, Nasdaq and the S&P both finished relatively flat, with the Nasdaq being the only major index on the positive side of the close. Money flowed into Technology somewhat as Traders are coming into the big names expecting blowout quarterly numbers on the back of Google's (GOOG) stellar quarter. Apple (AAPL) was one of those names today, as the stock was set to multi-month highs of $168 (+4.5%) and reports quarterly earnings after the bell on Wednesday.

Disclosure: Author owns AAPL, GOOG

Bank Of America & Wachovia see Profits Diminish but not Evaporate

The latest major US Financials to report earnings saw first hand the engulfing losses that have plagued many of their peers. Bank Of America (BAC) and Wachovia (WB) proved to be just as culpable in the US mortgage and credit mess as many of the other US banks and Investment Houses. Earnings for these two firms fell 95% and 98%, respectively.

Bank Of America, which till now, hadn't been hit by selling as hard as major competitor Citigroup (C), acknowledged a multitude of mortgage based losses and set liquidity provisions on its balance sheet to absorb even more. Now, while not as headline grabbing as the bigger losses of its peers, BAC managed to rack up over $5Billion in mortgage related write-downs and a further $5.5Billion in related trading losses. Even so, the company managed to eek out a small profit. $0.05/share vs. last year's mark of $1.16/share (Profits of $268Million vs. last year's $5.26Billion).

Revenue falling was also a concern as a 31% top line dive for any type of company can not be seen as healthy. Bank Of America also set aside over $3Billion for future related troubles (read: more losses due to bad loans), but it seems to have seen the worst for now. Analysts still expect somewhere over $4/share in earnings in FY2008, pegging a forward P/E for the battered bank at just under 9. In-line with what the markets expect to pay for the big Financials. BAC's cause was helped today by a 4% run-up (over 11% reversal from the open) in its stock.

If there's a less greedy bank option in the US, and one ripe for ownership for a longer haul reversal, it is probably BAC.

Another financial competitor, Wachovia, also posted a drastic decline in profit, but like BAC-and unlike others in the sector-it in fact still reported a profit! Profit numbers were minuscule at $51Million ($0.03/share) vs. a year ago result of $2.3Billion ($1.20/share). That's a spectacular 98% drop. However, it does show that Wachovia had some wits about itself to not completely jump in with both feet into a saturated sub-prime market. The revenue slide was not as great as most peers, coming in only 19% lower than a year ago at $6.3Billion.

Now, that's not to say all is well here, as in fact Wachovia increased its provisions for more losses many times over, 7 times in fact, to $1.5Billion, as well as recording a loss of $1.7Billion on loan related investments. That is a future provision of almost 1x current reported losses. This number is far more worrisome when compared to larger competitor BAC, which set provisions of only 0.3x current reported losses. Management however, reiterated that while poor results were in fact delivered today, the goals for the future and the expectations on those goals, remain very much in tact.

The Major Financials in this market-climate seem like a laundry list of the heaviest hit securities, and deservedly so, but some more than others, and a quick glance at profit declines and loan loss provisions shows which were in fact the greediest. While Citigroup tries to dig itself out of massive losses, others are simply dealing with profit cuts and slightly larger provisions. JPMorgan Chase (JPM) is an example of the latter, and along with BAC and WB seems to be the better candidate for a recovery into the later stages of this year and next.

Disclosure: Author is long BAC, WB