Bank of America (BAC -0.21%) recently reported third-quarter results that beat Wall Street expectations. Revenue of $25.2 billion was up 3% year over year, while diluted earnings per share rose 11% to $0.90.
But the stock hasn't been a winner in recent times. It's down 22% in 2023, a disappointment compared to the S&P 500's 8% gain and rival JPMorgan Chase's 2.5% increase.
Nonetheless, Bank of America is Warren Buffett's second largest holding. That's certainly a vote of confidence in the bank stock's investment merits.
So it's probably worth learning more about this business. Here are four things you need to know about Bank of America.
1. Its key revenue sources
There are numerous revenue drivers that investors should become familiar with. In the third quarter, the consumer banking segment generated 42% of the $25.2 billion of total company revenue, the most of any division. This segment provides banking, credit, and investing products to individual customers and small businesses.
The other three important divisions are wealth and investment management, commercial banking, and global markets. Combined, they accounted for the remainder of Bank of America's revenue in the quarter.
This is one of the largest financial institutions in the U.S., with total assets of $3.2 trillion and a deposit base of nearly $1.9 trillion. Only JPMorgan Chase is larger when it comes to domestic banks.
2. The macro impacts
The economic backdrop has been anything but normal in the past few years, with the pandemic, surging inflation, and rapidly rising interest rates resulting in uncertainty. Because of the industry it operates in, Bank of America feels the impact.
Take higher interest rates. Not only do they reduce demand from borrowers, but they also set the foundation for a higher rate of credit charge-offs. The company's provision for credit losses jumped 33% year over year to $1.2 billion, as management positions the bank for higher defaults. In fact, Bank of America reported a third-quarter net charge-off rate of 0.35%, nearly double the 0.20% of a year ago.
The flip side is that Bank of America's net interest income rose almost 14% in the first nine months of 2023 versus last year. And the business is still seeing growth in customer spending, a positive sign.
Despite the macro backdrop, Chief Executive Officer Brian Moynihan remains optimistic about the near term. "Our team of economists predicts a soft landing, with a trough in the middle of next year," he said on the third-quarter earnings call.
3. The competitive landscape
Investors can't buy Bank of America shares without carefully considering the industry landscape, which is ridiculously competitive. Not only does the business have to go up against other massive, diversified institutions like JPMorgan Chase, Wells Fargo, and Citigroup, there are also lots of regional banks, credit unions, investment banks, investment managers, insurance companies, and mortgage originators all competing with it.
But Bank of America has found success in the industry with its vast scale and brand recognition. Its wide range of products and services and trusted reputation also help. Plus, the company's deep financial resources should allow it to continue investing in tech capabilities that keep it ahead of the curve.
4. The current valuation
The book value of a company (its assets minus its liabilities) is a good way to value a bank because it typically has a lot of assets and liabilities on the balance sheet. Taken one step further, the price-to-book (P/B) ratio measures the stock's price to its book value per share. A multiple less than 1 is generally viewed as undervalued.
Looking at its P/B multiple of 0.77, it appears that Bank of America stock is very cheap right now. It's also below the five-year historical average of 1.1. Maybe this is a good time to buy shares.
