Appaloosa Management's positions in 4Q 2013

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Part 7
Appaloosa Management's positions in 4Q 2013 PART 7 OF 8

Why did Appaloosa sell its position in Bank of America?

David Tepper’s Appaloosa exited a 0.49% position in Bank of America (BAC) last quarter.

Why did Appaloosa sell its position in Bank of America?

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The bank has seen its share price increase during 2013 on the back of improving earnings and investor sentiment. In 4Q 2013, profits exceeded Wall Street estimates. BAC saw a net income of $3.4 billion, or $0.29 per diluted share compared to $732 million, or $0.03 per diluted share in the year-ago period. Revenue rose 15% from the fourth quarter of 2012 to $21.7 billion and the bank saw growth across its consumer banking, wealth management, global banking, and investment banking divisions. Chief Financial Officer Bruce Thompson said, “Capital and liquidity are at record levels, credit losses are at historic lows, our cost savings initiatives are on track and yielding significant savings, and our businesses are seeing good momentum.”

The bank said its Consumer Real Estate Services net loss narrowed to $1.1 billion for 4Q 2013 from $3.7 billion for the same period in 2012. The year-ago quarter included the settlements with Fannie Mae to resolve outstanding and potential repurchase and certain other claims and $1.1 billion of expense related to the IFR acceleration agreement.

As seen with many of BAC’s peers such as Wells Fargo (WFC) and JPMorgan Chase (JPM), mortgage originations declined 46% in 4Q 2013 due to rising interest rates. The bank saw an improving credit quality as provision for credit losses decreased $959 million from the year-ago quarter to a benefit of $474 million, driven primarily by increased home prices and improved portfolio trends.

Why did Appaloosa sell its position in Bank of America?

Bank of America’s litigation expense increased to $2.3 billion from $916 million a year earlier and $1.1 billion in the third quarter. The bank has been facing litigation over mortgage-related losses mainly connected to its 2008 acquisition of subprime lender Countrywide Financial Corporation. Analysts believe Bank of America has spent more than $40 billion on litigation and other mortgage expenses since its acquisition of Countrywide in July 2008 and Merrill Lynch six months later.

JPMorgan is bullish about the stock “due to the benefit from housing market recovery, potential for significant increase in normalized earnings, ongoing improvement of capital levels, relatively attractive valuation, and position as a leading retail and commercial banking franchise in the US.”


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