Bank stocks haven't been doing too well since the pandemic started and interest rates have been cut down, but that doesn't make them bad investments.
Bank of America (BAC 3.15%) is down after disappointing Wall Street with its first-quarter earnings report on April 15. But despite the drop -- which was partially due to a massive new provision for losses -- there were many bright spots in the quarter. Over time, Bank of America has grown its business and delivered value for investors. Is now the right time to buy shares?
Better business
Bank of America, like many of the big banks, has several ways of generating income, with a consumer bank, investment bank, commercial loans, financial advisory, and more. While the credit-card division showed decreased consumer spending at the beginning of the pandemic, as expected, loans and deposits hit an all-time high, specifically companies taking out their full revolving credit lines.
Bank of America Tower in Hong Kong. Image source: Bank of America.
Bank of America is No. 1 in U.S. deposit market share, according to the Federal Deposit Insurance Corp. (FDIC), and those deposits keep growing, with more than $1.5 trillion at the end of the first quarter. In the earnings call, CEO Brian Moynihan pointed out the $9.3 billion in pre-tax and pre-provision income, which was down 5% from 2019 but in actuality was a victory considering the low-interest-rate atmosphere. So while earnings per share looked disappointing, the bank's business actually looks very healthy.
Since banks are considered an essential service, Bank of America has kept 75% of its banks open for physical banking services, although whoever can work remotely is doing so. Investments in branches -- such as renovations, extra salespeople, and an increased minimum wage that the bank is keeping despite the current environment -- added 3% of expenses year over year.
Better banking
Bank of America showed strength in investment banking during the first quarter, with a 9% increase year over year in processed transactions despite a 20% decrease in investment banking transaction volume across all banks. Moynihan sees that as a sign of confidence in his company and the fruits of adding hundreds of bankers to his staff over the past few years, making for a higher-quality experience for clients.
One of Bank of America's competitive advantages is its strong focus on technology, and that has helped the company weather this storm as individual clients turn to digital to take care of their banking needs. In fact, even with advisors working from home, client engagement increased two thirds from the same quarter last year, and one third of sales are now processed digitally.
Bank of America is looking out for small-business clients as well, developing the first digital platform for the Paycheck Protection Program. While the bank saw higher expenses in the quarter related to investments in these advances, the expenses were partially offset by the improvements they created and the impact on client engagement.
Should you buy shares?
Does all of this mean investors should consider a position in Bank of America? I think yes, and beyond the healthy business, here's why.
As far as bank stocks go, Bank of America's price to earnings ratio under 8.5 is slightly lower than competitors such as Goldman Sachs and JPMorgan Chase. Its earnings have been compromised this quarter, but it has a solid cash position driven by increases in cash deposits, and it's trading for just a little over tangible book value per share.
Unlike many publicly traded companies that have suspended their dividends to hold on to their cash, Bank of America said it would keep up its dividend, which it raised to $0.40 from $0.18. It also hired 2,000 extra workers in March and vowed to hire 3,000 graduates into a summer program and then full-time work. These are all signs of strength.
Share price is down more than 40% year to date, making this a great opportunity to pick it up on a low, before the economy stabilizes.
Bottom line: Bank of America will not fall apart during the crisis, but it should follow the trajectory of the coronavirus and come out strong.
