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In case you haven't noticed, it's a whole new world in banking. And if you need proof, look no further than Bank of America's (NYSE: BAC ) second-quarter earnings release.
At the end of the second quarter, B of A had a "record" tier 1 common capital ratio of 11.2% based on Basel 1 rules. The layman's translation of that is: "We have a lot of capital, so we're stable and safe."
How do we know this? The bank put it right at the top of its press release -- it's the bank's very first highlight for the quarter. The second highlight covers the bank's estimate of its Basel 3 tier 1 common capital ratio (8.1%). The third highlight notes that the bank's long-term debt is down $53 billion.
It's not until the fourth bullet that B of A touts success from one of its business segments -- the investment bank finished the first half of the year ranked second in global investment banking fees, just behind JPMorgan (NYSE: JPM ) and edging out Goldman Sachs (NYSE: GS ) .
What B of A has chosen to highlight here is a big change from years past. Rewind to B of A's second-quarter earnings release from 2007, and the first thing you see is "Earnings Per Share Rose 8 Percent." Go back to 2006, and it starts by announcing the earnings tally, followed by "Net income up 18 percent," and then "Strong momentum across businesses."
In 2006, the key highlight was growth and momentum. Six years later, the main highlight is balance-sheet strength.
If we look at the way that investors value banks today versus back then, the change in rhetoric shouldn't be much of a surprise. At the end of the second quarter of 2006, B of A traded at 4.2 times its tangible book value, so it was imperative that it tout its growth and convince investors that the rich valuation would pay off. Today, the bank's stock trades at 0.6 times tangible book value. So forget growth -- B of A just needs to convince investors that its balance sheet isn't some sort of mirage.
It's the same story for other banks. Citigroup (NYSE: C ) , for example, had a price-to-tangible book of 3.7 in the second quarter of 2006, and that's fallen to 0.5 today. It has the same need to convince investors that it's not sitting on a toxic sludge pit of about-to-implode assets.
If you're looking for barometers of investors being greedy and fearful, this seems like one to put in your quiver.
When it comes to Bank of America in particular, though, Fool analyst Anand Chokkavelu has highlighted the stock's current low valuation as a key reason that the stock may be a buying opportunity -- but there are risks you need to know about too. To get Anand's full view on B of A, download the free premium report, "Why You Should Buy BAC."
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Report this Comment On July 21, 2012, at 3:34 PM, hanover67 wrote:
BAC is the "worst house on a bad block" at this point, and could very well be a winner is it gets fixed up. I've always felt that BofA was slow to recognize credit problems, leading to having to "take a bath' every so often, like the 2nd quarter of 1984.
But, today it has not only bad loans, but a mortgage mess, legal overhang, an unknown derivitive exposure, and a capital shortfall. The regulators have a formula called CAMEL for examining banks. It stands for Capital, Asset quality, Management, Earnings, and Liquidity. But they pronounce it C-C-C-C-CAMEL because they thnk Capital is the most important safequard against failure. So far, BofA is below the acceptable capital level the regulators want,
But, I think the most important factor is management. Does the current team have the brains and the guts to "take a bath," slow or reduce expense growth, restore credit discipline and thereby asset quality and avoid "doing something stupid?" The jury is out here.
Long term (3 to 5 years) we have to get our banking system back to good health, or our economy is going to be constrained. We need a healthy banking system to provide the credit for business investment. BofA may be one of the biggest and potentially best banks then, but not until then.
Report this Comment On July 22, 2012, at 10:26 PM, digitalroom wrote:
B of A is still alive and well. I believe this bank will come out of the mess that it's currently in in abt 3 yrs or so. The name is still trusted around the world. This one is the long haul for me!
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