This Part of Bank of America Corp Is Worth Nearly $50 Billion

A look into Bank of America's commercial and coporate banking unit.

Jun 5, 2014 at 7:41AM

Bank Of America

This article is part of a series on the complete valuation analysis of Bank of America (NYSE: BAC). For Jordan's full analysis, click here.

Name the number one investment bank.

No, it's not Goldman Sachs (NYSE:GS) or JPMorgan (NYSE:JPM). It's Bank of America.

The bank that everyone loves to hate is on the mend, and part of its investment banking arm, through its Global Banking unit, is performing spectacularly.

Bac Growth

What Global Banking does best
Global Banking is best described as a commercial and corporate banking unit. It's here that Bank of America stashes most of its investment banking advisory fees, a portion of its debt and equity underwriting fees, and fees and interest income from a more traditional corporate and commercial bank. 

When I think about Global Banking, I think about two discrete units. The first is the commercial banking portion, which works with smaller, middle-market businesses. Then there's the investment and corporate bank, which works with the world's largest companies, governments, and institutions.

Bac

A hedged business
Bank of America's Global Banking unit has performed well as low rates encourage corporate borrowing, boosting investment banking fees and loan growth. On the other hand, lower rates aren't good for the loan book, which has seen its net interest spread shrink by 0.5 percentage points, from 3.18% to 2.68% in the first quarter of 2014. A recent company presentation calls for $8.8 trillion in global debt issuance in 2014, down from a peak of $9.5 trillion in 2013.

Moreover, the bank is crimped by new regulatory oversight. In the middle market, for instance, regulators have imposed a soft limit of 6 times EBITDA leverage for buyout deals. That could soften demand for cheap leverage from Bank of America's corporate bank.

The good news, though, is that higher rates will lead to rising net interest income. Loans and leases are priced on LIBOR, thus an increase in interest rates may stymie the growth in debt underwriting fees, but propel earnings from the loan book.

Credit trends are improving. In the first quarter, nonperforming loans and foreclosures fell to 0.24% of assets, down from 0.66% in the first quarter of 2013.

Valuing Global Banking
Is the economy in the top of the third inning, or the bottom of the ninth? That's the real question for any cyclical business. And while I could pretend to know what the economy will bring three or four years down the line, I certainly don't know.

But that doesn't make the bank impossible to value. Rather, it means we have to be conservative and build in a margin of safety.

For a bank that generated greater than 20% returns on allocated capital in 2013, a multiple of 1.5 times allocated capital makes sense to me, given that cyclical, and largely unpredictable, investment banking revenue makes up roughly 20% of net revenue.

That would give Global Banking a valuation of $46.5 billion, less than ten times net income in 2013, and well in-line with its peers.

Upside comes in the form of an improved expense line. Bank of America has proudly ditched its least-valuable clients, slashing its client list by 55% since 2010. And although that may seem like a grave mistake, average revenue per client has doubled in that time. Becoming leaner has resulted in better profitability, for which shareholders should be very pleased. 

These stocks beat the big banks...
Here's your chance to pocket big dividends. Over time, dividends can make you significantly richer. And guess what? The big banks are laggards when it comes to paying dividends. So instead of waiting for a dividend windfall that may never come, check out these stocks that are paying big dividends to their investors RIGHT NOW. Click here for the exclusive free report.

For Jordan's full Bank of America analysis and total valuation number, click here.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Goldman Sachs. The Motley Fool owns shares of Bank of America and JPMorgan Chase. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers