Is It Time to Buy Bank of America Corp's Stock?

Because Bank of America's stock is no longer trading for a massive discount to book value, it's this Fool's opinion that the nation's second largest lender is no longer a "buy."

Aug 27, 2014 at 12:00PM

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Bank of America's (NYSE:BAC) stock is no longer as patently cheap as it was immediately following the financial crisis. But does this mean it's too late to invest in the nation's second largest lender? As I've noted before, I think it does.

Bank of America's progress since 2008
The fact that I don't believe Bank of America's stock is a buy at today's price doesn't mean I think the bank won't continue to make progress atoning for its past misdeeds -- click here for a complete list of Bank of America's legal judgments and settlements since 2008 -- and whipping its bloated operations into a more respectable condition.

Take the bank's latest legal settlement as an example. Earlier this month, the North Carolina-based lender announced a $16.65 billion deal with the U.S. Justice Department and a variety of federal and state agencies that probably brings Bank of America's chapter of massive legal settlements to a close.

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While the bank must still finalize a $2.5 billion dispute with mortgage bond insurer Ambac Financial (NASDAQ:AMBC), it's worth noting that the impact on earnings has probably already been recognized -- to a large extent, anyway -- in previous legal reserves.

Consequently, for the first time since the financial crisis, the benefit of Bank of America's earnings should begin accruing to shareholders as opposed to legal adversaries. In theory at least, this should result in a higher stock price as time goes on.

Bank of America's progress doesn't mean it's a "buy"
But the fact that Bank of America's bottom line is likely to improve doesn't mean its stock is a buy for the average investor at today's price.

It's important to remember that Bank of America isn't the only publicly traded bank stock in the United States. There are thousands of others to choose from. And among them are a handful of phenomenal operations that have consistently outperformed Bank of America in the past and that provide every reason to believe that they'll continue to do so going forward.

Four that come to mind are Wells Fargo, US Bancorp, M&T Bank, and New York Community Bancorp. All of these banks have demonstrated a tight grasp on the two most important aspects of running a profitable operation through multiple interest rate and credit cycles: manageable credit losses and a low efficiency ratio.

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The significance of these two metrics cannot be overstated, as they are the primary determinants of a lender's success. And in both cases, Bank of America has proved time and again that it doesn't have the institutional discipline to outperform its peers on a long-term basis.

In the most recent quarter, for instance, Bank of America's efficiency ratio was 84.4%, meaning that only 15.6% of its revenue isn't being consumed by high overhead costs from a sprawling and overly bloated branch network. By contrast, US Bancorp's efficiency ratio was 53.1%, Wells Fargo's was 57.9%, M&T Bank's was 59.4%, and New York Community Bancorp's was an industry-leading 43.4%.

The bottom line on Bank of America's stock
Whenever you're faced with the question of whether to buy a bank stock, or any stock for that matter, it's important to remember that you can be as selective as you like. And, quite frankly, the more selective you are, the better your returns are likely to end up being.

With this in mind, I can't help concluding that it would be a mistake for the average investor to buy Bank of America instead of one of its more proven competitors. Sure, its shares trade for a discount to book value relative to its peers. But you can rest assured that there's a good reason for why they do.

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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple, Bank of America, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. 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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