Counting Out This Bank of America Business Is a Huge Mistake

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.

What's a room full of traders worth?

To Bank of America, the answer is about $1.6 billion in net income just last year.

Looking at the trading desks
Global Markets thrives on trading revenue. Last year, trading account profits made up the largest slice of the company's revenue net of interest expenses. This has been the case for several years running, even in a post-Dodd-Frank environment.

The Global Markets business also follows the investment banking business in Global Banking. Bank of America allocates the bulk of advisory revenue to Global Banking. However, fees and commissions earned in brokering new deals mostly flow to Global Markets.

Global Markets isn't your average banking asset. The biggest driver of earnings is trading account profits. Total loans and leases make up just over 10% of the unit's total assets, and roughly 20% of net revenue.

The death of FICC
In the last year, we've heard time and time again that trading is dead. Revenue earned from FICC -- Fixed Income, Currencies, and Commodities -- is on a downward trajectory. Analysts have slashed their expectations for many of the bigger banks.

As always, though, these projections extrapolate today's industry realities into the future. And while the markets are benefiting from lower volatility, which hurts trading profits, this won't always be the case.

After adjusting for one-time events, Bank of America's Global Markets did see a year-over-year decline. Rival JPMorgan (NYSE: JPM  ) forecasts a 20% decline in FICC revenue for the second quarter. Goldman Sachs' (NYSE: GS  ) 13% decline in FICC revenue adds another data point that maybe traders are hitting a wall.

A bad business?
Trading can be a great business, but profitability largely hinges on volatility. You can't make much trading if asset prices merely stagnate.

Forecasting profitability for a trading outfit is about as much as a crapshoot as anything. But in the last three years, profits have topped $1 billion annually at Bank of America's Global Markets.

So what's it worth? A good comparable is Goldman Sachs, which trades at about 10.5 times trailing earnings. Though Bank of America's Global Markets probably isn't a Goldman Sachs, its Global Markets unit is deserving of a similar, but lower, multiple of earnings. A multiple of 9 times earnings seems fitting.

Excluding a one-time tax charge of $1.1 billion in 2013, Global Markets would have generated profits in the neighborhood of $3 billion. Thus, a multiple of 9 times earnings gives Global Markets a value of about $27 billion.

The fact of the matter is that volatility is gone today, but tomorrow is a different day. There's little reason to discount what is otherwise a great business for one or two quarters of lower profitability. And while results will vary from quarter-to-quarter, over a cycle, Global Markets is probably too cheap at just 9 times earnings.

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.

Read/Post Comments (0) | Recommend This Article (5)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2979785, ~/Articles/ArticleHandler.aspx, 8/28/2015 11:34:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jordan Wathen

"The liabilities are always 100 percent good. It’s the assets you have to worry about." - Charlie Munger

Today's Market

updated Moments ago Sponsored by:
DOW 16,609.00 -45.77 -0.27%
S&P 500 1,988.56 0.90 0.05%
NASD 4,819.58 6.87 0.14%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 11:18 AM
BAC $16.31 Down -0.13 -0.79%
Bank of America CAPS Rating: ****
GS $187.78 Down -0.78 -0.41%
Goldman Sachs CAPS Rating: ***
JPM $64.06 Down -0.42 -0.65%
JPMorgan Chase & C… CAPS Rating: ****