Bank of America Finally Made Everyone Happy

Despite the huge fine from mortgage loans originations, Bank of America could continue to deliver shareholders sweet returns over the long run. It's still trading much cheaper than both JPMorgan Chase and Wells Fargo.

Jan 27, 2014 at 7:27AM

G

Bank of America's main New York office at 1 Bryant Park.

Bank of America (NYSE:BAC) had just about everyone smiling ear to ear when it recently reported an impressive operating performance for 2013.

Right after the earnings announcement, its share price shot up significantly to more than $17 per share (shares sat around $5 just a few years ago). Despite the boost, Bank of America, at 0.83 times its book value, is still valued much cheaper than its peers, including JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC). Is it a good buy now?

Bofa

B of A's corporate headquarters on the left. Source: James Willamor.

Finally turning the ship
For the full year 2013, Bank of America managed to issue more than 3.9 million new consumer credit cards and generated as much as $3 billion of earnings in Global Wealth and Investment Management business.

All of that helped more flow to the bottom line. Net income jumped from $4.2 billion to $11.4 billion.

Bank of America closed 2013 with the strongest balance sheet position, with a Basel 1 Tier 1 Common Capital ratio of 11.19% and Basel 3 Tier 1 Common Capital ratio of 9.96%. The bank has also returned cash to its shareholders via both share buybacks and dividend payments.

It has bought back around $3.2 billion worth of shares at an average price of $13.90 per share. At the current trading price, Bank of America offers investors a very low dividend yield, at 0.20%, with a very low payout ratio of only 3%. Thus, most of its cash returns to shareholders were executed via share repurchases. 

Those worried about more big loan losses need not to. Bank of America has set up a huge loan-loss reserve for mortgage-related costs. And now that performance has been improved significantly, its provision for loan losses plunged from $1.9 billion in the fourth quarter 2012 to only $336 million at the end of 2013. That means more money can make its way to shareholders.

Looking forward, the bank would focus on several areas including capital generation, cost reduction, increased risk management, and addressing current legacy issues.

G

Although the recent results are pleasing investors for the moment, Bank of America needs to keep delivering improving results in the near future.

President and CEO Brian Moynihan commented that the bank has not achieved its true earnings potential yet. By 2016, it sets the goal to double its return on equity from 7% last year to 14%. 

Legal risks worry investors
The only thing that might concern investors is the huge regulatory risks Bank of America is still facing with mortgage fines. The bank has spent as much as $50 billion worth of settlements since the financial crisis. Last year, it had to pay around $10.4 billion to settle disputes over loans that were guaranteed by Fannie Mae. More payouts may be around the corner, but Bank of America has a hefty cash pile reserved to handled any anticipated payments.

Bank Of America

Is the stock a good buy today?
At the current interest environment, if any bank could generate around 12%-14% return on equity, it could trade closer to 2 times its book value. Wells Fargo, Warren Buffett's favorite bank, is the best-performing bank, delivering nearly 13.5% return on equity, and valued at 1.57 times its book value. In the long run, with the global leading position and a competent, talented CEO, Bank of America could significantly enhance shareholders' value. 

The bank Warren Buffett loves
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

Anh HOANG has no position in any stocks mentioned. 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