The financial crisis is almost a forgotten period for U.S. banks. After nearly a decade of recovery, too-big-to-fail financial institutions Bank of America (BAC -0.49%) and Goldman Sachs (GS -0.24%) have not only survived but thrived in the post-crisis bull market by finding new ways to grow. Even though the much hoped-for deregulation from a Republican administration has been slow in making itself felt, investors are nevertheless optimistic that both B of A and Goldman will eventually benefit from looser restrictions on how they do business.

Those who've invested in Bank of America and Goldman Sachs have already earned impressive returns. Yet they still want to know which of the two banking giants is better positioned for the future. Let's look more closely at B of A and Goldman to see which one looks like the smarter pick right now.

Opening to a bank vault

Image source: Getty Images.

Stock performance and valuation

Financial stocks have generally done well over the past year, but Bank of America is the clear winner in the recent past. Since December 2016, B of A has jumped more than 30%, compared to just a 6% rise for Goldman over the same period.

You might think that given their disparate performance, Bank of America's valuation would have grown well above that of its peer. Using simple earnings-based measurements that look at recent financial statements over the past 12 months, B of A does have a higher trailing earnings multiple of 17, compared to just 13 for Goldman Sachs. The gap narrows considerably, though, when you look at valuations based on near-term future expected earnings. Goldman's forward multiple comes in at just over 12, but Bank of America drops to just above 13.

Another common measurement of bank valuations involves book value, and here, the edge goes the other way. B of A trades at about 1.24 times book value, compared to 1.29 times book for Goldman. All in all, Bank of America has better momentum for investors, and valuations are relatively similar.


One area in which bank stocks haven't returned to their former glory is in the dividends that they pay. Before the financial crisis, many financial institutions were among the top dividend payers by yield in the market. Now, it's rare to find high-yield bank stocks, especially among the larger, better-known institutions in the industry. Bank of America currently yields 1.6%, while Goldman Sachs weighs in at 1.15%.

Bank of America has made a more recent push to boost its dividend than Goldman. Goldman's last increase was a $0.10-per-share boost to $0.75 per share quarterly, made earlier this year. Bank of America paid only a token $0.01 per share every quarter until 2014, when the Federal Reserve finally granted permission for the bank to boost its dividend to $0.05 per share. Subsequent increases of 50% and 60% over two successive years brought the payout to its current level.

Goldman hasn't been all that interested in raising its dividend dramatically, seemingly content to return large parts of its capital through share buybacks. For yield and dividend growth potential, B of A looks like the better pick.

Growth prospects and risk

Bank of America has made a lot of progress in just the past year. For a long time after the financial crisis, B of A suffered from a high cost of capital that held back its profit margins from reaching their full potential. Yet since mid-2016, the bank has put costly one-time charges and other speed bumps behind it, posting strong and consistent earnings that put B of A near the top of its industry. A rising interest rate environment is improving things for Bank of America's retail lending business, making it easier to profit from net interest spreads. With changes at regulatory institutions like the Federal Reserve and the Consumer Financial Protection Bureau, investors are hopeful that B of A will find new ways to make money more efficiently than in the past. With efficiency ratios and returns on assets improving, Bank of America finally looks like it's made it all the way back from the crisis.

Goldman Sachs has seen a few more challenges lately. The company's trading business saw mixed success in its most recent quarter, with declines in fixed-income and equity-related activity weighing on Goldman's overall revenue. Yet the banking giant was able to offset those revenue declines through smart practices in its investing and lending operations, taking advantage of good conditions in the private equity market. A trend toward consolidation in many industries also has Goldman's investing banking advice business thriving. Long-term bulls are hopeful that once market volatility levels return to more normal levels, Goldman's trading unit will be able to propel the investment bank sharply higher.

Both Bank of America and Goldman Sachs have advantages and disadvantages, but more recently, B of A has had more momentum. That seems likely to continue in 2018, especially if conditions for retail banking keep improving while the investment side of the business slows down.