The Shocking Proof People Don't Trust Bank of America

Take one look at Bank of America's credit rating, and it's clear that individual consumers like you and me aren't the only ones who distrust it more than competitors like Wells Fargo.

Mar 30, 2014 at 12:30PM


Everybody knows Bank of America (NYSE:BAC) isn't the most popular bank among individual consumers like you and me. But what fewer people appreciate is how distrusted the Charlotte-based lender appears to be within its own peer group of sophisticated financial corporations.

Like people, corporations have credit scores -- or, more specifically, credit ratings. These are issued by a triumvirate of rating agencies: Standard & Poor's, Fitch, and Moody's. Take a look at the table below, which ranks the nation's four largest banks according to Fitch's assessment of their creditworthiness.


Credit Rating

Wells Fargo (NYSE:WFC)


JPMorgan Chase




Bank of America


Source: Company filings.

As you can see, Bank of America is tied for last place, with a rating of "A" -- Fitch's ratings span from a highly coveted "AAA" down to "D," with intermediate scores, like a single "A," qualified with plus and minus signs as in grade school.

The significance of this is more than just reputational. Like individual consumers with lower credit scores, a bank with a lower rating must pay more to borrow money. I've depicted this in the following chart, which shows the interest rates these banks paid on long-term debt in 2013.


Make no mistake about it; elevated borrowing costs are a serious issue for a company like Bank of America. Fundamentally, banks are nothing more than leveraged funds that arbitrage interest rates. They borrow at low short-term rates (complementing these funds with a smaller portion of longer duration borrowings) and then lend the money back out at higher long-term rates, either via loans or various types of fixed-income securities.

It follows that higher borrowing costs necessarily weigh on a bank's profits. And, in fact, this is exactly what we see when we compare Bank of America to its most analogous competitor, Wells Fargo. The former has an interest rate spread of 2.27% whereas the latter's spread is a 3.27%.

On an income basis, this means Bank of America earns 20 basis points less on its interest-earning assets than Wells Fargo does -- this is calculated by taking the difference between the two banks' net interest margins. This seems minuscule until you consider that Bank of America held an average of $1.75 trillion in earning assets in 2013. Thus, multiply that by 0.2% and you get $3.5 billion in profit. This would have boosted the bank's net income to common shareholders by 35% last year.

The takeaway here is twofold. In the first case, this helps to explain why a bank like Wells Fargo is so much more profitable than Bank of America. Beyond this, however, it goes to show just how much more money the latter can earn once it finally gets its house in order.

The biggest change you never saw coming
While Bank of America gets its duck in a row, there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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