I'll preface this article by saying that in general I would recommend buying both Bank of America (BAC 1.00%) and Visa (V 0.33%). Bank of America is the second-largest bank in America by assets and has come a long way since the Great Recession. It has built up a very solid capital foundation, allowing it to absorb tens of billions in loan losses and still maintain solid capital ratios. It has also managed to stay profitable during the very difficult economic conditions created by the coronavirus pandemic.
Unfortunately, in this showdown, it happens to run into an absolute juggernaut in Visa. Over the past decade, Visa has grown from just shy of $22 per share at the beginning of 2010 to nearly $188 per share at the end of 2019. It has been less volatile than Bank of America through the coronavirus pandemic, with its current share price trading slightly higher than where it began the year, and the acceleration of digital payment trends brought on by the pandemic bodes extremely well for the company.
Image source: Visa.
Less volatility
If you're looking for the company with less risk here, than Visa appears to be the winner through the pandemic. As a reminder, although you may see its name on your credit card, Visa does not actually extend credit and therefore does not face potential loan losses. Rather, Visa's role is processing the payment, a much more lucrative service.
Visa reported net income for the nine months ended June 30 of $8.7 billion, down just 4% from the same period ended June 30, 2019. Net income for the three months ended June 30 was down 23% from the same three months of 2019. But this happened when global payments volume declined 10% over the past three months, while cross-border payment volume dropped 47%. Meanwhile, spending volume in other payment categories that have been hit hard by the pandemic and contribute to Visa's top line such as travel, entertainment, gas, and restaurants are still declining on a year-over-year basis.
Despite Visa's struggles, Bank of America has fared much worse. Through the first six months of the year, Bank of America reported net income of $7.5 billion, down about 49% from the same time period of 2019. And the thing is I think most investors and analysts were somewhat encouraged by this. Being a traditional bank and the second-largest by assets in the U.S., Bank of America has exposure to the consumer through its credit card portfolio, to small businesses, and nearly every industry in the global economy. Yes, Visa is impacted as well, but it's different in the sense that the company isn't directly lending money.
So much potential for growth
While I think there is plenty of opportunity for Bank of America with digital payments trends, Visa is already seeing the heavy shift benefit its business through the huge uptick in e-commerce spending. The company measures this in a category called card-not-present volume, which Visa executives on the company's recent earnings call said has increased more than 25% (not including travel) on a weekly basis starting in April. Card-not-present volume is now at a level twice as high as before the pandemic. There are also extremely positive movements with Visa's tap-to-pay card products, a contactless payment solution that allows users to simply tap a card when purchasing products or items at a store. This is obviously a perfect product for the pandemic, and Visa has now issued more than 80 million new tap-to-pay cards in the first six months of 2020, a trend executives expect to continue post pandemic .
Then consider that Visa only captures about $9 trillion of annual payment volume in a market that it thinks is worth $185 trillion, and rapidly shifting payment behaviors, and you can really see the growth opportunity Visa has.
Visa will likely grow faster
If large banks like Bank of America can escape the pandemic in a similar position as they're in now, I think they really have some serious growth potential. Warren Buffett certainly seems to think so, having recently pumped an additional $2.1 billion into Bank of America's stock. But Visa's price-to-earnings ratio of more than 37, which far eclipses Bank of America's, shows that investors have high expectations for the company. And rightfully so, given the exciting things happening with digital payments.
There is no wrong choice here, but Visa has proved to be safer during the pandemic and a much more exciting buy right now.
