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The 1 Reason You're Wrong to Hate Bank of America

While Bank of America (NYSE: BAC  ) had a ho-hum quarter that left many on Wall Street shrugging their shoulders, there was one key thing that could transform your opinion about the investing prospects of this giant bank.

Strong consumer results
Somewhat troublingly, Bank of America's consumer business' net income took a turn for the worse in the second quarter as its net income fell by roughly 4% when compared to the first quarter. However, it saw an incredible rebound in the third quarter as its consumer and business banking segment's net income skyrocketed to the highest level since the third quarter of 2011:

Source: Company earnings report.

In total over the last year, the consumer unit's profits rose by more than 30%. Compare that to Citigroup (NYSE: C  ) , whose consumer business income fell by 22%, thanks in large part to lower revenue.

What was most encouraging about this gain was the fact that it resulted from all four of the ways banks can earn money for their shareholders. It watched both sources of revenue net interest income (money earned on loans) and non-interest income (fees, service charges, and other associated things) rise, while its provision for credit losses (what it expects to lose on loans) and expenses each fell:

Source: Company earnings report.

At times, different business segments can see strong earnings in large part because of one of those things going right in a quarter, which is often the result of a one-time adjustment or gain. Yet Bank of America's consumer and business banking segment managed to hit on all four this quarter, which was a true win.

Yet not only did it deliver higher profit margins and returns, but it was also able to generate those returns more effectively to shareholders. This is best seen in its efficiency ratio -- which measures the cost required to generate each dollar of revenue -- and the consumer business has also seen steady improvement in that area as well.

After five straight quarters hovering around 56%, it dropped all the way to 53% in the third. Compare that with the Wells Fargo (NYSE: WFC  ) community banking division, whose efficiency ratio rose from 56.6% to 57.7%, as shown in the chart below:

Source: Company earnings report.

As a result of all of this, Bank of America's largest segment was able to improve its return on average capital dramatically, from 19% to 24%.

As a final point of comparison, JPMorgan Chase's (NYSE: JPM  ) consumer and business banking return on equity fell from 34% to 27%. It is important to note that banks all measure business returns differently -- so just because JPMorgan's is higher doesn't mean it's necessarily better -- but it is important to see that its profitability declined while Bank of America's went up.

While Bank of America has faced many uphill battles in recent years, it has seemingly turned the corner on its most vital business segment -- and the real benefactors could be not only its customers, but its investors as well.

Beyond the third quarter
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Read/Post Comments (4) | Recommend This Article (4)

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 October 20, 2013, at 8:29 AM, grumpy92148 wrote:

    I can give you many reasons we must put B.O. A and chase bank out of buisness. The main reason is they distroyed the lives of millions of people for no reason. I also have almoast five thousand dollars credited to my account that does not belong to me, who does this money belong to? I have been fighting with these rat bastards over my mortguage for over four years. I have sued these bastards once allready,yes I did win. But they still can't grt it right. I am going for round two only this time we are going to FEDERAL court !!! If you are smart you will take your money somewhere else before they give it to someone else.

  • Report this Comment On October 20, 2013, at 9:12 AM, aciescott wrote:

    I can give you a good reason to hate BOA and never to do business with them. I had a free checking account for 4 years that was changed to a checking account with a 20 monthly service fee. So I withdrew all my money and closed the account they re-opened the account to charge the monthly service fee. It took 7 months to finally successfully close this account.

  • Report this Comment On October 20, 2013, at 12:21 PM, StuSegal wrote:

    As a former Merrill Lynch shareholder who still holds BAC my feeling is . . . great, now I'm only down 74%. As to banks, my best bank investment to date has been HDB, which I bought at $9, now trades at mid-$30s, and still has upside potential . . . check it out.

  • Report this Comment On October 21, 2013, at 9:54 AM, multi007 wrote:

    BoA isnt going out of business. Posters above would love to see that, but it aint happening. I dont care about the "millions of lives" the bank apparently "destroyed".

    The stock was at $6 when I bought it. It is now almost $15. My options (that I keep rolling over) are treating me very very nicely.

    That's all I care about.

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