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Steer Clear of Bank of America

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Every party has a pooper, and when it comes to Bank of America (NYSE: BAC  ) , I'm quite comfortable assuming that role. Having finished 2012 with its share price more than doubled, B of A is an investor darling right now. But we all know that the most popular kid in school isn't necessarily the best or the brightest, or the one we should be hanging around with.

Despite its recent success in the stock market, B of A has some glaring issues, and some potentially lurking ones -- issues that should make any prudent investor think twice.

The ghost of excess past
It's no secret B of A came out of the financial crash in worse shape than many of its peers. Its acquisition of Countrywide Financial in 2008 was breathtakingly ill-timed, as many of the questionable loans the mortgage-origination giant made in the previous few years began to go bad soon after its purchase. To date, the Countrywide acquisition has cost B of A more than $30 billion in losses. 

But is that the end of B of A's subprime horror story? With more than $2 trillion in total assets, B of A presents a balance sheet that's practically impossible for the average investor to assess. What about the bank itself? Shouldn't it know the state of its own assets and liabilities? Given that the superbank didn't have the capacity to figure out the dangers lurking in Countrywide's balance sheet, it shouldn't be taken for granted that B of A now knows the state of its own.

And then there's the danger of further legislation or fines resulting from crisis-related behavior. B of A settled suits for billions of dollars in 2012, and it's far from certain whether that's the end of it. Per the Financial Times, B of A has set aside $6 billion for any remaining legal issues -- no insignificant amount -- so even it isn't sure. A Foolish colleague who writes in the banking sector hit the nail on the head when he said to me: "The thing with Bank of America is, you just don't know when the other shoe's going to drop."

The peril of opportunities being missed
One can argue about the breadth and the depth of it, but most would agree that the U.S. housing market is undergoing a recovery. And if this recovery's sustainability is in question, one only need look to the latest round of the Federal Reserve's quantitative easing program, QE3, to feel at least a bit more sure of it: QE3 is unprecedented in its measures, aimed specifically at boosting the housing market.

I covered this in-depth in a column last week, but in a nutshell here's what's going on with B of A that makes me question the bank's current direction: QE3 aims to give banks incentive to lend to prospective homeowners, which many of the banks are currently doing to great effect, except for B of A. In the third quarter of 2012, JPMorgan Chase (NYSE: JPM  ) made $50 billion in home loans, a 29% year-over-year increase. Wells Fargo (NYSE: WFC  ) made $141 billion in home loans in Q3. Meanwhile, B of A's mortgage originations dropped by 37% YOY. Why? Quite simply, the bank was burned so thoroughly by its Countrywide experience that it's now wary of getting back into the home-lending business.

But times have changed. It was subprime lending that blew up the banks, and that's a thing of the past. Or, at the very least, there are no indications it's happening right now. If B of A doesn't get over its fear of home lending, it's going to be missing out on a lot of easy money moving forward.

Find better friends
All banks are impenetrable to some degree, and no banks are as straightforward to invest in as, say, Coca-Cola or a Starbucks, but Bank of America seems more impenetrable than most, with a scarred internal culture that's clearly holding it back from making the kind of money it should be.

Looking for a big bank to put your money into that has less baggage and a little more get up and go? In Q3, JPMorgan grew its earnings by 33.9% YOY. B of A's plummeted 94.5% for the same period. Goldman Sachs (NYSE: GS  ) has a return on equity of 7.64% -- nothing to write home about, but a lot better than B of A's 2.32%. And while Goldman's revenue grew 132.8% YOY for Q3, B of A's revenue contracted by 25.5%.

At the risk of sounding like a parent, these are the kinds of kids that you as an investor should be hanging around with right now.

Of course, don't let this Foolish party pooper have the last word when it comes to Bank of America. Check out The Motley Fool's brand-new report on B of A. Our analysts give you a thorough detailing of the superbank's prospects along with three reasons to buy and three reasons to sell. Just click here for full access.


Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2013, at 9:14 PM, kthor wrote:

    noted and still BAC bull

  • Report this Comment On January 05, 2013, at 11:41 PM, neamakri wrote:

    Does Q3 buy houses? I didn't think so.

    Ben Bernanke thinks that he gives money to banks and they loan it to the public to buy houses. Nope, they take the money and play the stock market. Thanks Ben for killing my grandchildren's inheritance, all for the sake of banks making MORE profit.

  • Report this Comment On January 06, 2013, at 11:05 AM, XMFGrgurich wrote:

    Kthor, hey, here at TMF we're a motley bunch. As such, we have widely differing opinions. This is mine. If you bought at the beginning of last year and held on, kudos!



  • Report this Comment On January 06, 2013, at 11:07 AM, XMFGrgurich wrote:

    neamakri, one more thing I will say re QE3 is this: It was a housing bubble that caused the crash, and I hope that the Fed's program won't cause another.

    Thanks for checking in.


  • Report this Comment On January 06, 2013, at 11:41 AM, Rusty56 wrote:

    I see nothing in this article of much substance going forward. I also see this bank in much better shape going forward, seems like a steal to me at these levels over the next few years. Motley Bunch is right.

  • Report this Comment On January 06, 2013, at 1:15 PM, paxmaker wrote:

    Part of the argument here is that history can repeat itself. If that were the case, investors would avoid, like the plague many equities which have flirted with or declared bankruptcy for either market or management reasons. Yes, BAC has had a very rough road and still has the vestiges of bureaucratic inertia holding back is recovery and yes, there are threats for more "punishment" especially by regulators or Congresspersons who were either asleep at the switch or helped push the switch in the first place.

    Yet, BAC has Countrywide, the demon, now in a recovering housing market with tougher lending rules, and piles of lending cash available pending finalization of Dodd (ugh!!)/Frank (ugh! ugh1). Credit card use and overseas developments also seem vibrant. So, discounting a possible mini recession caused by the Bernank/Obam stimulus thinking, BAC will continue to recover and be in the high 20's by early 2014, IMHO.

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