As the each of the U.S.'s big banks looks to move strongly into 2013, Bank of America (BAC -0.13%) is giving investors some especially compelling reasons to put it on their radar. While the market did not react particularly favorably to the bank's recent earnings report, the figures look better than that reaction suggests.
Furthermore, both political and economic conditions are setting up in such a way as to support a positive trajectory for the stock moving forward. Below are four reasons I believe the stock is a buy and belongs in your portfolio.
1. Earnings
Last Thursday, B of A announced earnings of $0.03 per share on net income of $0.7 billion, news that lands with a bit of a thud when compared to the $2.0 billion, or $0.15 per share achieved a year ago . On a fully taxable-equivalent basis, net of interest expense, the company saw revenues for the quarter fall from $25.1 billion a year ago to $19.6 billion. For 2012, B of A had earnings of $0.25 per share on $4.2 billion of net income, compared to $0.01 per share on $1.4 billion in revenue in 2011 . While the figures are not great, given all of the cost-cutting measures the bank has been taking (discussed below), they're a solid step in the right direction.
2. Political context
The last time Congress allowed the debt ceiling to become an eleventh-hour showdown, U.S. debt was downgraded for the first time ever. Now that the House has passed a bill to buy some time , the reaction from the White House and Senate will be critical. The stability of U.S. debt, the safety of the economy from a pending recession, interest rates, and economic stimulus are all matters that directly impact B of A. The fact that the showdown has been avoided, or at least dramatically postponed , could allow the major banks to capitalize on the stabilizing economy through improving balance sheets and increased loan demand.
3. The yield curve
Last year, the bank extended $75.1 billion in residential loans, and because the bank depends on rate spreads to earn money on the loans it holds, the yield curve is a critical factor for investors to keep an eye on. The earnings associated with mortgage lending plays an important role in the bank's potential future growth. The bank is taking a cautious approach under CEO Brian Moynihan, and having success as it looks to resurface from the pall of 2008 and consequent events.
A recent article from Reuters discusses the expectation that the yield curve will steepen over the course of the year -- this refers to what happens when longer-term interest rates rise faster than shorter-term rates. The actions of the Fed have had a "flattening" effect on the curve , as a part of the effort to keep long-term borrowing rates low in order to stimulate growth. If the economy stabilizes and the Fed's bond buying eases, rates will begin to rise. The steepening curve will benefit B of A in that as longer-term rates rise, the bank will be able to earn more on the credit it extends. Additionally, the spread between what it earns on longer-term debt versus short-term debt will improve, which should lead to another source of increased revenue. This is yet another reason I am bullish on B of A at current levels.
4. Belt tightening
Finally, as Fool Amanda Alix explains, the belt tightening going on at B of A, Citigroup (C -0.32%) and others is targeted at the right goal, but cannot be allowed to overshoot its objective. In the fall of 2011, Bank of America CEO Brian Moynihan announced his intention to achieve cuts of $5 billion by the end of 2013 . Last fall, he announced that the bank had bettered its capital reserves by $12 billion through the divestiture of $60 billion in non-core assets . To this same end, Citi announced the layoffs of 11,000 employees that are expected to save the bank $1 billion by year end. Citi is in the midst of a streamlining procedure under new management and is taking those strides that should help it emerge stronger than ever.
Cost-cutting, bottom-line-bolstering moves like these are a way that B of A's Moynihan has proven to be a trustworthy steward for the venerable institution, cutting fat but still looking to responsibly grow revenues.
For each of the above four reasons, I am of the opinion that Bank of America is getting it done and deserves careful consideration for inclusion your portfolio. While none of these factors alone is enough to warrant buying the stock, when combined, the case is compelling. Overall, I think B of A is poised to perform in 2013.
