Thursday's market plunge was the closest proxy to pure panic the markets has suffered in two years. It was also a stark reminder that investors view Bank of America, and to a lesser extent Citigroup Inc., as second-class citizens in the company of JPMorgan Chase & Co and Wells Fargo & Co. The relative poor performance of B of A and Citi stock is more than a slight. It's an emphatic statement that the companies are at greater risk in any crisis. At a time of eroding confidence, investors made it clear that they regard Bank of America is standing nearest the edge of the cliff.
Over the course of the last five days, shares of Wells and JPMorgan have moved in tandem with the KBW bank index of 24 institutions, slightly outperforming its 9% loss. Bank of America and Citi, meanwhile, underperformed the index by 7.5 and 3.8 percentage points, respectively. Bank of America closed out the week at $8.17, a 16% total loss.
Both Bank of America and Citi have higher betas than their peers, meaning they are generally volatile than Wells and JPMorgan. In recent months, B of A has followed a pattern of matching the KBW index's rises but magnifying its losses. Investors appear conditioned to reflexively sell Bank of America's stock in times of trouble.
Given Bank of America's market capitalization now accounts for a mere 40% of its book value, this trend should be all the more worrisome. Were this week's trends to hold in a more pronounced crisis, the company's ability to raise equity would decline disproportionately in relation to its peers'. Even before Bank of America's worst week of the year, Bloomberg's Jonathan Weil labeled its dwindling market cap a "continuing menace" to the financial system.
Nor is the problem just skittish equity investors. Bank of America's 5-year credit default swap rates, which represent the cost of insuring against its failure, long ago overtook Citigroup's to become the highest among the major banks. Lately, the spread between its rates and those of peers has widened; on Friday 5-year CDS on Bank of America stood at 207 basis points, or 55 above the rate Citi.
Judging a company's prospects based its treatment in the markets in a single week is not altogether fair, but somewhere in Bank of America's 7.5% drop on Friday is some substantive news on mortgages. Since Thursday afternoon, the company has announced that "rigid" standards by Fannie and Freddie may cause it to again exceed its mortgage repurchase cost estimates. New York's attorney general also assaulted the bank's landmark $8.5 billion proposed mortgage bond settlement.
Regardless of how the markets fare on Monday, stopping the flow of such surprises would be the best way for B of A to get its stock to move in line with its peers'. Analysts aren't hopeful.
Looking at Bank of America's stock midweek, Stifel Nicolaus's Chris Mutascio backed out an estimate of the additional losses investors expect the company to incur: $48 billion. As bad as that sounds, it might be less pessimistic than the view S&P Equity Research analyst Eric Oja took in a Friday note. Citing the New York AG's brief and B of A's expectations of additional government sponsored entity-related costs, he declined to even venture a guess at the company's mortgage exposure.
"Our previous recommendation on BAC had been based on our view these costs were contained and quantifiable, but we no longer have this view," Oja wrote.
One thing that's not secret: Markets hate nothing quite so much as uncertainty.
