Banking on America

10/13/2008 10:21 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

George Putnam, editor of The Turnaround Letter, says Bank of America will be much stronger when the crisis ends.

With $1.7 trillion in assets (as of June 30th) and more than 6,000 banking centers from coast to coast, Bank of America (NYSE: BAC) is the largest retail bank in the United States.

BAC has managed to avoid many of the subprime lending and other problems that have felled some of its competitors, but its stock has nonetheless been hurt as the whole banking sector has gone out of favor. After spending most of 2006 and 2007 in the $50s, the stock dipped as low as $18 during July before settling at its current level (around $20).

The company took its present form when North Carolina-based NationsBank acquired California-based Bank of America in 1998 and took on the latter's name. It has continued to grow by acquisition ever since. In addition to its retail banking, the company has a significant presence in other financial services such as business banking and asset management.

Chief executive officer Ken Lewis apparently shares Baron Rothschild's belief about buying when the blood is running in the streets. He has taken advantage of the turmoil in the financial sector to broaden BAC's reach by acquiring major national players in two key sectors.

At the beginning of this year, he stepped up to buy troubled mortgage lender Countrywide. Then, this past month, he agreed to buy Merrill Lynch (NYSE: MER) when the giant broker was coming under pressure. These bold moves, if successful, will make Bank of America into a retail financial powerhouse of unrivalled proportions. It is already the banking leader in many areas of the country. Add to that the country's largest retail mortgage company in Countrywide and the largest retail stock broker, and you have the potential to serve most of the financial needs of a large swath of the American population.

There is the risk, of course, that BAC will not be able to integrate these huge acquisitions to harness their full potential, but Bank of America under Lewis has a good track record of successfully absorbing large acquisitions.

Moreover, the strategic fit seems better than the diversification programs of some of the other financial titans. In addition, many competitors in all of BAC's business segments have been significantly weakened recently, which helps clear the path for the banking giant to succeed.

The road ahead may be a little bumpy for BAC's stock. The company is not immune to further write-downs relating to the ongoing troubles in the real estate industry. And there will certainly be hiccups in the process of integrating Countrywide and Merrill. But the potential is huge, and we believe that BAC will eventually realize much of it. Even if you have to wait a while to see the ultimate upside, the stock pays a very generous dividend (it yields just under 6%-Editor) to compensate you in the meantime.

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