3 Things Bank of America Corp Needs to Do to Make Investors Happy

The three most critical things Bank of America needs to do achieve outperformance over the next 5 to 10 years.

Jun 12, 2014 at 7:24AM

Bank Of America

Bank of America's (NYSE:BAC) stock has been one of the most hotly debated investing stories over the past several years. Recently, the bulls have been been winning. Shares of Bank of America are up nearly 170% since the beginning of 2012.

However, much of that increase has been driven by multiple (Price to Tangible Book Value) expansion rather than growth in tangible book value. Over that same time period, shares of B of A went from trading at a 65% discount to tangible book value to a 17% premium today -- a multiple expansion of 161%.

While the outlook for the bank has improved, greater expectations have crept into today's stock price and the bank will need to execute on a few key areas going forward to drive long-term shareholder value.

With that in mind, we asked three Fools who cover the bank extensively what they believe is the most critical thing Bank of America needs to do achieve outperformance over the next 5 to 10 years.

David Hanson, Financials Bureau Chief: Many investors believe putting its legal and mortgage issues in the past is the most important hurdle Bank of America needs to clear, but that's a short-term problem. More importantly, Bank of America needs to focus on underwriting profitable loans through the next credit cycle.

Before the last downturn, Bank of America's credit metrics looked strong, but when the tide turned, the bank's loan book was exposed and nonperforming loans spoiled the books:


Source: Capital IQ

The bank's consumer loan book (credit cards, home equity loans, etc.) was its problem area in the past so investors will want to keep a close eye on management's strategy on growing this business and how the bank is reserving against future losses. Another credit downturn will happen and banks will suffer, but the banks that don't have to decimate their earnings and capital levels with huge provisions will be ones that emerge stronger.

Patrick Morris, Banking Contributor: If I can be honest, there's a lot I like about Bank of America. It still trades at a discount relative to many of its peers, it's executing on many of its initiatives to grow its businesses in a profitable way, and while he may not be inspiring of the big name bankers, CEO Brian Moynihan is doing a great job leading the bank.

But one thing that always is eye-opening and would really make investors -- like myself -- happy, is better expense management. One way this is measured is its efficiency ratio, simply a measure of total expenses divided by revenue. And a glance over the last 5 years shows you where it was, and, regrettably, where it is:


Source: Company Investor Relations.

Thanks to the legal settlement in the first quarter of this year, its efficiency ratio stood at 97.7%, and with a rumored $12 billion (or more) in legal settlements coming, that number isn't poised to go down anytime soon.

But even just a glance from last year's core businesses, meaning the legal costs are excluded, you can see some are quite high:


Source: Company Investor Relations

While 61% is exponentially better than 77%, it still leaves something to be desired.

The reason this is important is because those expenses translate straight to the bottom line. If Bank of America was able to improve to say 55% in its core businesses (where it stood in 2009), it would mean nearly $5 billion more added to its net income. And that is to say nothing of what could come when the legal expenses finally stop.

Bank of America has a lot which will make investors happy, but if it continues to executive on slashing expenses, their smiles will get even bigger.

Matthew Frankel, Banking Contributor: One of the best ways for a bank to lower costs and operate more efficiently is to effectively cross-sell its products. According to a recent report, it costs eight to ten times less for a bank to sell additional products to existing customers than it does to pursue new ones.

Moynihan has been pushing Bank of America's staff to cross-sell, and so far it looks like its working. Last year, B of A sold three times as many 401(k) products to existing business customers as it did in 2012.


The company has also been highly effective in selling credit cards to its customers, issuing more than a million new cards in the first quarter alone, up by more than 10% from the same quarter last year. However, there is still room for growing the credit card business among the bank's existing customers. Bank of America has the number one retail deposit market share in the U.S., but is number three in credit cards.

Additionally, there is still room for growth to cross-sell in other areas, such by selling Merrill Lynch's "Merrill Edge" brokerage accounts to the bank's retail customers. Wells Fargo, which is generally recognized as the master of cross-selling, says the average brokerage customer has a total of 10 different banking products with the company, as opposed to an average of six products for non-brokerage customers.

These stocks beat Bank of America...
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 cash 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.

David Hanson owns shares of JPMorgan Chase. Matthew Frankel has no position in any stocks mentioned. Patrick Morris owns shares of Bank of America and US Bancorp. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo and has the following options: short June 2014 $48 puts on 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