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Better Buy: Goldman Sachs vs. Bank of America

By Matthew Frankel, CFP® – Updated Apr 23, 2019 at 10:23AM

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These are two strong institutions with great recent results. Which is the better buy?

Bank of America (BAC -1.29%) and Goldman Sachs (GS 0.13%) have certainly come a long way since the financial crisis ended about a decade ago. Both are tremendously profitable, well-run institutions that now have a strong focus on asset quality and efficiency.

However, both trade at low valuations relative to peers. Bank of America trades for a lower price-to-book multiple than either JPMorgan Chase or Wells Fargo, despite comparable profitability metrics. And Goldman Sachs trades for a big discount to closest competitor Morgan Stanley, even though Goldman is doing a great job of leveraging its brand name and expertise into an entirely new revenue stream.

With that in mind, here's an overview of the value case for both banks and which one you might want to consider for your portfolio.

Check out the latest Goldman Sachs and Bank of America earnings call transcripts.

Man with confused expression.

Image source: Getty Images.

Bank of America is firing on all cylinders

Not only did Bank of America's 2018 results handily beat analyst expectations on both the top and bottom lines, but the company's numbers don't look anything like those of the struggling institution that was trading for fire-sale prices just a few years ago.

For example, the bank's 11.6% return on equity (ROE) and 1.24% return on assets (ROA) are well ahead of the industry benchmarks of 10% and 1%, respectively. And its 58% efficiency ratio is a four-percentage-point improvement over a year ago and is one of the best among its big-bank peers.

Furthermore, Bank of America is doing a good job of generating growth and continuing to improve efficiency. Just to name one example, Merrill Edge brokerage assets actually grew by 5% year over year, despite the decline in the stock market, thanks to $25 billion in net inflows. And the bank's award-winning mobile platform saw usage rise 16% year over year, a big contributor to efficiency.

Goldman Sachs: Lots of potential with one big question mark

Like Bank of America, Goldman Sachs handily surpassed expectations in its most recent earnings report. Advisory revenue surged by 56% from the same quarter a year ago, and the investment banking business remains arguably the best on Wall Street.

One particularly exciting revelation is that Goldman's investing and lending revenue shattered expectations by a 36% margin. This part of the business includes the Marcus consumer banking platform, and while Goldman and most experts have frequently discussed its potential, it is doing even better than virtually anyone thought possible.

However, there's one big question mark keeping Goldman cheap. For its role in the 1MDB Malaysian bond scandal, Goldman could potentially have several billion dollars in liabilities. And the status of the matter is largely unclear, as bank officials can't say too much given the ongoing nature of the investigation.

One is clearly cheaper

To be perfectly clear, these banks are two different levels of "cheap." Bank of America trades for a price-to-book multiple of 1.15, significantly cheaper than most of its big-bank peers. For context, JPMorgan Chase's P/B ratio is 1.47, and Wells Fargo trades for a multiple of 1.3.

On the other hand, because of its lingering uncertainty, Goldman Sachs trades for a 19% discount to its book value. For much of the past year, the two institutions' valuations were much closer, but they significantly diverged after news of the 1MDB scandal and its potential implications broke.

BAC Price to Book Value Chart

BAC Price to Book Value data by YCharts.

The bottom line: Which is best for you?

These are two excellent, well-run financial institutions, and both are trading at dirt-cheap valuations. Goldman Sachs is by far the cheaper of the two, but it also has the most uncertainty. If you don't mind dealing with short-term headwinds, Goldman Sachs is the bank stock for you. On the other hand, if you want a bank stock with reasonable valuation, great performance, and less legal risk, Bank of America could be the better buy for you.

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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