The financial sector has been one of the strongest areas of the market over the past few years, and Bank of America (BAC -3.53%) has done better than most. In fact, Bank of America's stock price has nearly tripled over that time.
However, there's good reason for the tremendous outperformance. Bank of America is a much-improved institution, and there are several growth catalysts that could propel the bank's profits even higher over the coming years. Here's a rundown of its various improvements and growth catalysts to determine if it's still worth buying now.
Image source: Bank of America.
Tremendous improvements in recent years
I already said that Bank of America is an "improved institution" over the past couple of years, so for a little more color, here's what I mean by that.
Bank of America has taken steps to greatly improve its efficiency and profitability. For example, it has closed over 250 branches and has invested considerable resources in developing its online and mobile platforms, which are far more cost-effective than in-person banking transactions. Just to name one statistic, roughly one out of every four of Bank of America's deposit transactions now happen through its mobile app -- an increase of more than 50% in the past two years.
In addition, the bank has done a good job of reducing its expenses. In fact, despite its $193 billion deposit growth and $33 billion loan growth over the past couple of years, noninterest expenses have actually declined by 4.4%.
The result is greatly improved efficiency and profitability. The bank's efficiency ratio has dropped by more than 8 percentage points (lower is better), and while they aren't quite where they need to be just yet, return on assets (ROA) and return on equity (ROE) are much closer to the 1% and 10% industry benchmarks than they used to be.
|
Metric |
Q4 2015 |
Q4 2017 |
|---|---|---|
|
Efficiency ratio |
70.2% |
62% |
|
ROA |
0.61% |
0.93% |
|
ROE |
5.1% |
7.9% |
Data source: Bank of America earnings reports. 2017 data excludes the one-time impact of tax reform.
Forward catalysts
Even though Bank of America has made tremendous progress over the past couple of years, there's still a lot of room for improvement in areas such as increasing the usage of mobile services and other technologies, continuing to grow its Merrill Edge brokerage business, and more.
In addition, there are a few industrywide catalysts that could be a major boost to Bank of America's bottom line.
For starters, the Federal Reserve is expected to raise interest rates several more times over the next couple of years, which should lead to increased margins. In fact, over the past year, the bank's net interest yield expanded by 16 basis points thanks to a few Fed rate hikes. Bank of America estimates that a 100-basis-point (1 percentage point) parallel shift in the yield curve would translate to $3.3 billion in additional net interest income over a 12-month period.
Tax reform is another big potential catalyst. Bank of America has historically operated at an effective tax rate in the 30% ballpark. So, the new 21% corporate tax rate could translate to billions in additional profit.
Is it a buy now?
Bank of America is one of the largest stock positions in my own portfolio, and I have no plans to sell my shares anytime soon. If I didn't already own the bank, however, I would still feel comfortable adding more of it at the current share price.
I feel that the higher price is more than justified given the bank's improved profitability, asset quality, and efficiency, and if the catalysts I mentioned here translate into larger profits, the current valuation could actually seem rather cheap.
