During the height of the Great Recession, shareholders in bank stocks were taken for quite the ride. Bank of America (NYSE:BAC), which is one of the largest banks by deposits in the U.S., saw its shares dip by more than 90% from peak to trough. The company's acquisition of the troubled lender Countrywide Financial, coupled with numerous settlements with the Justice Department, really weighed on Bank of America's stock.
However, times have changed, and BofA has done a complete 180. Since hitting its lows in 2009, Bank of America shares have rallied more than 500%, and practically all facets of the company's business are trending in a positive direction.
In many ways -- 10 to be more precise -- Bank of America could be the world's most perfect stock.
1. Monetary tightening means more profit
Arguably the biggest factor working in Bank of America's favor at the moment is the Federal Reserve's ongoing monetary tightening. Since Dec. 2015, the Fed has increased its federal funds target rate by 25 basis points on three occasions. Its latest increase pushed the fed funds target rate to a range of 0.75% to 1%.
Banks with variable loans thrive when interest rates increase because it means an immediate boost to variable loan rates, while increases to savings account rates lag. This is a recipe for higher net interest income and net interest margin for Bank of America.
In its fourth-quarter earnings presentation, Bank of America said that a further 100 basis point increase in short- and long-term lending rates would lead to $3.4 billion in added net interest income.
2. Cost-cutting improves flexibility
Bank of America has done an exceptional job cutting its costs in order to operate more efficiently. A good chunk of these reduced costs resulted from branch closures.
Before the financial crisis, B of A had more than 6,000 physical branches. By the third-quarter of 2016, its physical presence had reduced to a little more than 4,600 branches. The rise of mobile banking has allowed Bank of America to reduce some of the high overhead costs of maintaining a physical branch presence.
For example, data released from JPMorgan Chase (NYSE:JPM) back in 2015 showed that depositing money with one of its tellers ($0.65) cost over 20 times more than a mobile banking transaction ($0.03). Though these figures may have changed a bit since 2015, and B of A's statistics could be a tad bit different that those of JPMorgan Chase, this gap is still an incentive for banks to cut their expenses by reducing their physical presence in favor of online and mobile banking.
3. Double-digit mobile banking growth
Bank of America's Q4 presentation pointed out that it ranked as the top dog in mobile-banking functionality and digital-sales functionality in separate reports from Forrester Research. Digital sales now represent about 20% of Bank of America's total sales, and growth in active mobile users has actually accelerated in each of the past four quarters in percentage terms. In short, consumers crave convenience, and Bank of America has no qualms about providing that convenience since it's considerably cheaper over the long run. It's a win-win for everyone.
4. Litigation is in the rearview mirror
Breathe a big sigh of relief long-term shareholders -- the litigation and settlements that Bank of America faced because of it or Countrywide's lending practices before and during the Great Recession are firmly in the rearview mirror.
No bank took it on the chin more than BofA. A report released last year from national policy resource center Good Jobs First found that BofA paid $56 billion of the more than $160 billion in fines issued since 2010. These fines regularly weighed on the bank's bottom line, and it really constrained any type of reinvestment. With large settlements a thing of the past, Bank of America has thrived with a clearer outlook, higher net income, and the ability to reinvest in faster growing business segments.
5. Long-term debt declining
Investors may not think about debt as being a problem for big banks, but it can be just as much of a financial constraint as in any other industry. At the end of 2009, Bank of America was lugging around $523 billion in debt on its balance sheet.
According to its Q4 report, it's now reduced its long-term debt to just $217 billion. There's still work to do, and the fact that it's cutting costs and seeing higher net interest income as interest rates rise is helping. But falling long-term debt levels should reduce Bank of America's cost of funds and thereby increase its profitability.
6. Loan and deposit growth
Let's not forget that the bread-and-butter growth engine for all banks, small and large, are their loan and deposit growth. While a bank the size of B of A isn't going to deliver double-digit loan and deposit growth, steady growth is nonetheless a good sign -- and that's exactly what we're seeing.
Bank of America ended the fourth quarter with $1.26 trillion in deposits, up from just shy of $1.2 trillion in the fourth quarter of 2015, while total loans and leases, including non-U.S. consumer credit cards, rose to $916 billion from $897 billion in the prior-year period. To see both deposits and loans growing with interest rates on the rise is great news for BofA.
7. Credit quality remains high
It's just not that Bank of America is making more loans, it's also seeing the quality of its loans improve as net charge-offs for both its consumer and commercial businesses have improved on a year-over-year basis. Commercial net charge-offs have fallen by nearly half -- $186 million in Q4 2015 to $105 million in Q4 2016 -- while consumer net charge-offs have dipped to $775 million from $958 million over the same period.
Best of all, as the number of nonperforming loans and leases has fallen, it's reduced the need to set aside allowances for delinquent loans and leases, resulting in higher profitability.
8. It's well-capitalized
Bank of America's reduced costs and improved net interest income, coupled with the fact that it retains more of its earnings each year than most other big banks, have led to a considerably better capitalized bank. Its tier 1 common tangible equity ratio has improved 80 basis points, to 11%, over the past year, and it has two times the coverage for annualized net charge-offs, meaning that it's safer than it's been in years.
9. Shareholders are getting more
Bank of America's new-found success hasn't been lost on its management team. Its improved capital position and higher interest rates have allowed it to begin sharing the wealth with its patient shareholders. Since mid-2014, B of A has increased its quarterly dividend from $0.01 per quarter to $0.075 per quarter as of its latest payout. The possibility of the Trump administration deregulating the banking industry, including easing the Federal Reserve's veto power over big bank capital plans, could wind up pushing this payout even higher in the years to come.
10. Bank of America is still cheap
Last but not least, Bank of America is still a fundamentally attractive bank, even after returning more than 500% from its March 2009 closing lows. Based on its $16.95 tangible book value (TBV) as of the end of Q4 2016, Bank of America is currently valued at 1.36 times its TBV. Historically, this is still on the inexpensive side for a major bank. It's also lower than many of B of A's banking peers.
On an earnings basis, Wall Street is expecting the bank to earn $2.10 in earnings per share (EPS) in 2018, yet it's surpassed Wall Street's EPS consensus in each of the past seven quarters. This makes its forward P/E of 11 even more enticing.
I may be biased as a long-term shareholder, but Bank of America may very well be the market's most perfect stock.