Could Bank of America Corp Really Trade Again at 2 Times Book Value?

Bank of America has historically traded at substantially higher P/B multiples, which raises hopes that the bank will be able to command a higher valuation in a few years.

Jul 9, 2014 at 1:23PM
G

Source: Company

Bank of America (NYSE:BAC) didn't do a good job lately on the public relations front. First it had to announce a material $4 billion error in calculating its regulatory capital, which was not only embarrassing, but also caused the bank to suspend its capital plans. Secondly, the bank continues to battle the Department of Justice about ending its probe into soured mortgage-backed securities.

In order to end the probe and reach a settlement, the bank offered to put $12 billion on the table, a big sum even for deep-pocketed banking giant Bank of America.

All of this is certainly not helping Bank of America's reputation and stock price: A continuously low market valuation as evidenced by a persistent 23% discount to book value shows, that investors still avoid the bank as an investment.

While news about looming big-time settlements and suspended capital plans do not do their part to convince investors of Bank of America's underlying value, it often helps to take a step back and look at the bank's valuation from an unemotional point of view.

Headline risk
Headline risk, such as the admission of the accounting error which sent shares of Bank of America lower by 6% on the day the mistake was announced, is inherently short-term.

Short-term noise often clouds the underlying value of a company and Bank of America certainly has received more than its fair share of headline risk.

Legal troubles and settlements have weighed down Bank of America for a long time, but a look at Bank of America's historical valuation should give investors a good feel as to what a more appropriate market valuation for the bank might be if conditions normalize.

Historic valuation
Bank of America has been trading at substantial discounts to book value since the financial crisis unfolded in 2008. After a short period of recovery in 2010 and 2011, its book value discount actually increased again in 2012 when the bank faced renewed litigation risk with respect to its Countrywide acquisition in 2008.

Investors ultimately ran for the hills and dropped shares of Bank of America like hot potatoes causing shares to trade at a whopping 70% discount to book value in 2012.

G

Looking at Bank of America's P/B valuation over an extended period of time, however, shows, that the bank has historically traded at a price to book value of 2x or more in periods of market exuberance (2006-2007).

And there is no reason why Bank of America wouldn't be able to achieve a similar valuation three or four years down the line when litigation issues have been resolved, its asset quality has been further improved and the company has been going full in on growth.

Just about last year, in August 2013, renowned bank analyst Dick Bove went on record and said "it is not very difficult for a bank stock in normal times to sell at two times book value. There are virtually no banks in the United States selling at two times book value."

Normal times are still not here yet, but there is a decent chance, that Bank of America's book value will mean-revert in the future.

Nevertheless, short-term risks persist for Bank of America. Especially with respect to litigation expenses and potential settlement, Bank of America could deliver some unwanted surprises in 2014, which could put further pressure on its stock price.

So far, Bank of America's shares have lost 1% in 2014, but gained about 10% since their May 2014 lows.

The Foolish Bottom Line
Bank of America has historically traded at much higher P/B ratios than the current book multiple of 0.77x and a return to the 2x region in a better operating environment is reasonable.

Even though the bank has recovered a lot of ground since it was once again thrown under the bus in 2012, its book valuation is still relatively low compared to its book valuation before the financial crisis.

With a resurging U.S. economy, Bank of America should be able to benefit from cyclically peaking bank earnings and fetch a materially higher price to book valuation as investors' focus shifts from litigation troubles to growth and multiple expansion.

Bank of America + Apple? This device makes it possible.
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its destined to change everything from banking to health care. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here

Kingkarn Amjaroen owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. 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