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Better Buy: Bank of America Corporation vs. Goldman Sachs

By Matthew Frankel, CFP® – Nov 3, 2018 at 8:18AM

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A head-to-head comparison of two attractive bank stocks.

Bank of America (BAC) and Goldman Sachs (GS) are among the most attractive stocks in the financial sector right now. Not only are both banks trading for cheap valuations despite strong performance, but they also have lots of potential to grow profits.

With that in mind, here's a look at how Bank of America and Goldman Sachs compare to other big U.S. banks in terms of valuation, as well as reasons to be bullish on both banks and which one looks like the better value right now.

Buildings on Wall Street.

Image source: Getty Images.

Both stocks are among the cheapest in their industry

Both of these stocks are often on the radar of value-conscious banking investors, and it's easy to see why. On both a price-to-book and price-to-tangible book basis, Bank of America and Goldman Sachs are among the cheapest big U.S. bank stocks.

Bank Name

Recent Stock Price

Price-to-Book Multiple

Price-to-Tangible Book

Bank of America

$26.78

1.11

1.56

Goldman Sachs

$219.28

1.11

1.18

JPMorgan Chase (JPM)

$106.70

1.56

2.04

Wells Fargo (WFC)

$52.69

1.43

1.90

U.S. Bancorp (USB)

$52.32

1.92

2.72

Morgan Stanley (MS)

$44.50

1.10

1.26

Data Source: TD Ameritrade (Stock prices), Ycharts (Valuation metrics). Figures as of market close on 10/30/18.

Despite their relatively low valuations, Bank of America and Goldman Sachs both have a lot going for them. Let's take a quick look at how each company is performing and where they could be heading.

Bank of America has made tremendous improvements

Since the end of the financial crisis, Bank of America is arguably the most-improved large bank. After years of struggling to profit, the bank is now earning returns well in excess of industry benchmarks and operates at a 57% efficiency ratio -- one of the best among its peers.

The bank continues to grow in a responsible way, with continuous improvement in charge-offs and loan delinquencies. Bank of America has also emerged as a leader in banking technology and plans to invest billions more to build out its technology platform. Furthermore, Bank of America still has lots of untapped potential in its Merrill Edge brokerage platform, which grew its assets at a 22% year-over-year pace in the third quarter.

One of my favorite things about Bank of America is that it's well-positioned to thrive in a rising-rate environment. Of the bank's $1.35 trillion in total deposits, about $426 billion are non interest-bearing, meaning that they don't cost the bank anything. This is a higher percentage than Bank of America's big-bank peers and means that if interest rates continue to rise (which is widely expected), the bank's profits could soar. In fact, Bank of America estimates that a 100-basis-point rise in interest rates (long and short term) would translate to an additional $2.9 billion in annual net interest income.

Goldman Sachs has a massive and largely untapped opportunity

Goldman Sachs has also generated strong overall performance recently. Goldman has the top market share in mergers and acquisitions, equity offerings, and IPOs, and grew its investment banking revenue at a double-digit year-over-year rate in the third quarter. And, Goldman's return on equity (ROE) through the first three quarters of 2018 is the highest it's been in three years. Trading revenue has been a bit weak recently, but this weakness has been outweighed by the firm's overall strength.

While Goldman's core businesses are strong, it is the fast-growing Marcus consumer banking platform that I'm most excited about. So far, Marcus only offers personal loans and deposit accounts, and its success has been impressive. Just two years after launch, for example, Marcus celebrated $4 billion in total loans made. This is the primary reason that Goldman's investing and lending division saw 56% year-over-year net interest income growth in the third quarter. And, the business is still quite small compared to the market leaders, so there's still lots of potential here.

In addition, Marcus is going to start adding new revenue streams as well. The firm just announced that it's developing a wealth management offering designed for the masses, and there are (yet unconfirmed) reports that Goldman is getting set to jump into the credit card business in a big way. And, in a recent presentation, then-President David Solomon mentioned several other possible growth avenues -- including mortgages, auto loans, insurance products, and checking accounts.

Which is the better buy now?

Both banks are pretty evenly matched in terms of valuation, and I consider the recent results of both to be quite strong. However, I'm leaning toward Goldman Sachs here, simply because I don't think the market is pricing in the company's massive untapped consumer banking potential. If Goldman can grow its lending and deposit businesses to a few times their current sizes (which would still be quite small by industry standards), launch a successful wealth management platform within Marcus, and add a few other consumer banking revenue streams, the bank could see a massive spike in profitability.

To be clear, I don't think either is a bad investment at the current price -- in fact, I own Bank of America and don't plan to sell it anytime soon. At the current valuation, however, Goldman Sachs is looking like a real bargain given its potential.

Matthew Frankel, CFP owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bank of America Stock Quote
Bank of America
BAC
Goldman Sachs Stock Quote
Goldman Sachs
GS
JPMorgan Chase Stock Quote
JPMorgan Chase
JPM
Morgan Stanley Stock Quote
Morgan Stanley
MS
Wells Fargo Stock Quote
Wells Fargo
WFC
US Bancorp Stock Quote
US Bancorp
USB

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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