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Settlement brightens outlook for Bank of America, fund managers say

A Bank of America sign is pictured in Encinitas, California January 14, 2014. REUTERS/Mike Blake

By David Randall and Peter Rudegeair

NEW YORK (Reuters) - Bank of America’s (BAC.N) decision to pay $16.7 billion (10.07 billion pounds) to settle charges stemming from the sale of mortgage-backed securities may finally allow the company to put last decade’s housing bubble behind it, fund managers and analysts say.

The Charlotte, North Carolina-based bank, the second-largest in the United States, announced Thursday that it will pay a $9.65 billion cash penalty, and provide $7 billion of relief to homeowners, to resolve the majority of its remaining liabilities connected with its purchases of Countrywide Financial Corp, once the nation's largest mortgage lender, and Merrill Lynch & Co.

The size of the settlement will “wipe away another quarter’s worth of earnings,” said Marty Mosby, a bank analyst at Vining Sparks. Yet it will also free chief executive Brian Moynihan, who took over from embattled chief executive Ken Lewis, under whom the company purchased Countrywide Financial in 2008, to move the company forward, he said.

“At this point most of the overhang issues related to mortgage have been dealt with, and we can start to see how he can start running the company for shareholders and not litigants,” Mosby said.

Including Thursday’s settlement, Bank of America Corp(BAC.N) has agreed to pay around $70 billion to resolve legal disputes related to the financial crisis. In contrast, JPMorgan Chase & Co (JPM.N) has agreed to pay around $30 billion.

Stephen Dodson, portfolio manager of the Bretton Fund (BRTNX.O), began buying shares of the company in late 2013 largely because he was attracted to the size of the company’s deposit banking arm. The settlement provides “a relief over the stock price” because it eliminates the uncertainty of the bank’s liabilities, he said.

Shares of Bank of America were up 1.1 percent for the year to date through Wednesday’s close, slightly below the 2.2 percent gain for the KBW Bank Index over the same time. They gained 65 cents, or 4.2 percent, in afternoon trading Thursday.

Prior to Thursday's announcement, shares of Bank of America traded at 0.7 times book value, a measure of the total value of the assets on a company's balance sheet. Shares of rivals such as JPMorgan Chase & Co., by comparison, traded slightly above book value, making them more expensive by comparison.

While the settlement is lifting Bank of America's shares, it may not be enough to cap a significant rally, said Dave Ellison, a portfolio manager at Hennessy Funds who owns shares in the company.

"This stock won't really work until interest rates go up a little bit," he said.

Bank of America shares are widely held. The company is a major holding of well-known mutual funds such as Fidelity’s Contrafund (FCNTX.O) and the Dodge & Cox Stock Fund (DODGX.O) that are mainstays of retirement accounts. Warren Buffett’s Berkshire Hathaway Inc (BRKb.n), meanwhile, invested $5 billion in Bank of America in 2011 in exchange for preferred shares and warrants to purchase 700 million common shares in the bank at a price of around $7.14 each.

If he exercised the warrants at the current share price, Buffett could make an immediate $6 billion profit, though he has said he has no plans to exercise them until close to their 2021 expiration date.

Not all fund managers welcomed the size of the settlement. Shareholders are bearing the costs of the mistakes of previous executives at Bank of America, Countrywide and Merrill Lynch who long ago left those companies, said Joe Terril, president of Terril & Co, which manages around $760 million and owns Bank of America shares.

“It’s a slight disappointment to me that they settled the issue for this much money,” Terril said, who added that the settlement resolved “probably 97 percent” of Bank of America’s outstanding legal issues.