Is Bank of America Getting More Credit Than It Deserves?

Bank of America already enjoys a great deal of optimism regarding its ability to slim down and boost returns.

Jan 24, 2014 at 7:30AM
Bank Of America

Wall Street is usually a forward-looking sort of place, but investors may be taking it a bit far with Bank of America (NYSE:BAC).

While the bank does indeed have substantial scope for improving its costs and taking advantage of higher rates, current valuations seem to factor in almost no risk that the bank won't succeed -- a rather high amount of faith in a company that really hasn't done a lot to earn it yet.

Bank of America definitely has more to gain from higher rates than Citigroup, JPMorgan, Wells Fargo, or U.S. Bancorp, but investors have to assume that they will manage to cut costs and maintain credit discipline should they arrive. With that, JPMorgan and Wells Fargo continue to offer more upside in a "base case" scenario, but if everything goes right, Bank of America could continue to tick higher.

Solid as a rock
To its credit, Bank of America did deliver a pretty solid set of results relative to expectations.

Bank Of America

Revenue rose 2% sequentially, with net interest income up about 5% -- well ahead of the barely positive growth of JPMorgan or Wells Fargo. Although B of A saw slower deposit growth than these two rivals, net interest margin improved both annually and sequentially. The bank's fee income wasn't bad; like JPMorgan and Wells Fargo, B of A saw a big decline in mortgage banking, but trading and investment banking held up better (albeit from a lower base).

Despite the bank's efficiency ratio still hovering in the vicinity of 70% (much higher than its peers), expenses ticked lower on the back of the bank's New BAC initiative. All together, core pre-provision profits were up about 30% from the year-ago period, and 14% from the prior quarter.

Where's the growth?
One disappointment was the loan growth at Bank of America. Neither JPMorgan nor Wells Fargo had a quarter to brag about, but the 1% sequential decline at Bank of America was surprising given the comments from other lenders about improving loan demand. While credit loans saw growth both in and out of the U.S., all of the other consumer loan categories were down, and C&I lending was up just 1%. While there weren't big growth numbers posted, credit quality managed to improve.

Where to from here?
Bank of America has lost a lot of share in the mortgage market over the past three or four years, with Wells Fargo and JPMorgan taking up some of that business. Even so, Bank of America holds about 12% of the retail deposits in this country.

Bank Of America

This is also a very asset-sensitive bank. Looking through the company's SEC filings, a 100 basis point parallel rate move would drive Bank of America's pre-tax 2014 earnings about 14% higher. That's roughly double the leverage JPMorgan or Citi would have to the same move, and more than double the leverage at Wells Fargo.

Although rising rates would likely lead to some increase in defaults (particularly in commercial), rates usually head higher when the economy is stronger on balance.

Investors should still be looking for better expense leverage from Bank of America. The bank's cost structure is still inflated, and while the stock has more than tripled since its late 2011 lows, the company's tangible book value is up only 4% since the first quarter of 2011, and return on tangible assets has remained quite weak.

Bank Of America

The bottom line
There is definitely significant scope for Bank of America to improve its operating performance and results, but investors are already baking a lot of that into the valuation. More progress with profitability in 2014 would support a higher book value-based multiple. If the bank can consistently deliver double-digit returns on its equity base, the stock may still be a bargain.

That said, JPMorgan and Wells Fargo may still be better buys than Bank of America. Investors everywhere want to like the Bank of America recovery story, and if the bank can stay out of trouble, there's definitely still more room for value-generating improvement.

Is Bank of America a stock to own forever?
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Stephen D. Simpson, CFA, owns shares of JPMorgan. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers