Yesterday, Bank of America announced that it was investing $2 billion to acquire a stake in Countrywide Financial. The investment is another example of how dominant Bank of America is becoming in the country’s financial system. It already is the largest retail bank in the country, serving tens of millions of customers and has the largest branch and bank network. The company also purchased MBNA last year to have one of the largest credit card portfolios.
Over the last two years, Bank of America has tried somewhat unsuccessfully to increase its share of the mortgage market. In the first six months of 2007, Bank of America was the fifth-largest originator of home loans in the U.S., with a market share of about 7%, according to Inside Mortgage Finance. The investment in Countrywide is the foot in the door for Bank of America and a chance to gather more knowledge about the business before making a bid for it.
Over the last five years, the company’s stock has shown solid and consistent growth. Bank of America pays a 5% dividend and generated $21.1 billion last year. The bank is flush with cash, has a solid balance sheet and is aggressively pursuing opportunities in attractive markets. I think more than any other bank, Bank of America can truly become the dominant bank in the US.
Comments
Zuper
August 25, 2007
The way that I see it B of A pulled the deal of a lifetime with Countrywide. Since the deal is for preferred stock with a 7% + coupon that can be converted into equity at 18, plus has a right of first refusal in any sale of Countrywide, it effectively values the later around $15 a share. Yet, the stock traded at 21 when it was announced (has traded much higher and now trades again at 21). While Countrywide probably won't survive this, it is a gift because they sold something to B of A at less than 75% of its market value at that moment. You can be sure that B of A went to work and hedged this deal, syndicated it to clients, etc. They've probably already walked away from the stock with a half billion dollar gain plus are still holding the option on Countrywide. It is amazing what you can do when you are the biggest bank in the country, but I cannot imagine that some other institution wouldn't have jumped at the opportunity to give Countrywide better terms.
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