So far in 2023, the stock market has generally seen some bounce back from last year's bear market. All except for one sector that took an exceptionally hard hit this year -- banking. Bank stocks across the board tumbled in March after a few high-profile bank collapses rattled the sector.
The real issues that brought down those banks were, for the most part, confined to those specific institutions. They were exacerbated by economic conditions, but they were also mostly caused by internal issues. Despite that, investors' fears that the trouble would spread pulled valuations down across the whole sector. This included some large banks that remain strong, are well-capitalized, and had good quarters.
The situation created some excellent buying opportunities, and one of the best values right now is Bank of America (BAC 0.88%).
Bank of America stock is historically cheap
Bank of America, the nation's second-largest bank by assets, is near its lowest valuation in seven years, with a price-to-earnings (P/E) ratio of 8.4 and a forward P/E ratio of 8. The only time its P/E dipped lower during that period was at the start of the pandemic in March 2020, when it hit 8.2, but it recovered quickly from that slide.
Further, it's trading below its book value, with a price-to-book ratio of 0.9. That, too, is its lowest level since 2017, with the exception of a few points near the start of the pandemic. These are two key indicators of a stock that is trading below its intrinsic value.
That's likely one of the reasons that Warren Buffett added to Berkshire Hathaway's already-large position in Bank of America in the first quarter. The bank is the second-largest holding in the conglomerate's stock portfolio: It owns just over 1 billion shares with a total value of more than $29 billion. In Q1, Buffett increased that stake by 22.75 million shares. The conglomerate now owns 12.9% of the bank.
Aside from its low valuation, Bank of America had a surprisingly good first quarter. It added a record 36.1 million net new checking accounts, benefiting from the fallout of the regional bank failures that led some customers to switch to more stable, liquid, and well-regulated banks. That contributed to Bank of America's 13% increase in overall revenue and its 15% jump in net income, year over year, in the first quarter.
Flight to stability
The impact of the banking sector crisis on Bank of America's deposits in the first quarter was minimal -- average deposits were down 1% from the fourth quarter and 3% year over year. But while some customers may have been shopping around for better interest rates before the trouble began, they flocked back to Bank of America in the final weeks of the quarter in a flight to safety. It will be interesting to see how its deposits look at the end of the second quarter.
Bank of America's liquidity position also improved last quarter, as its common equity tier 1 ratio rose to 11.4%, up from 11.2% at the end of 2022 and 10.4% in 2022's first quarter. And its efficiency ratio in consumer banking has improved to 51%, down from 56% a year ago. (This metric reflects how much a bank spends to generate revenue: The lower the ratio, the less it's spending to generate each dollar of income.) Bank of America had the best efficiency ratio among major banks, even lower than JPMorgan Chase, which was at 52%.
The bank was buoyed over the past year by strong gains in interest income, as rates skyrocketed and loan activity remained robust. While the potential for a recession could stunt its growth in the near term, Bank of America is one of the biggest, best-run banks in the world, and for long-term investors, it is just too good to pass up at this discounted price.
