It may be an unpopular opinion to have, but this holiday season, I'm thankful for Bank of America (BAC 2.06%).
You may be thinking that is an absolutely absurd thing to think, much less write, and I would definitively agree there are countless things that justify the scrutiny the bank has been under for the past few years. But as we near the end of 2013 and approach 2014, there are three reasons I think investors should be thankful for this big bank.
1. The worst is likely behind it
Bank of America has paid out somewhere between an unparalleled $40 and $50 billion in legal settlements. It has been beset by its $5 debit card fee fiasco, evidence of faulty lending practices, terrible customer support, and general things that make consumers and investors alike shake their heads.
While this is certainly no excuse for its former practices (and I agree they are troubling), looking ahead, since Bank of America has already been through the ringer with so much litigation, evidences of new scandals are much less likely.
I'll never say "never," but I think most of Bank of America's problems are behind it, and it is on the way to recovery. I would also suggest this is not true simply from an investor's perspective, but from a customer perspective as well. The bank has learned from its past mistakes and has been working to improve its image in the eyes of all people.
2. It benefits from an improving economy
Evidence continues to mount that the depths of the financial crisis are behind us and the U.S. economy is on the path to recovery. In the second quarter, Brian Moynihan, the CEO of Bank of America, noted:
The economy continues to improve across all areas, that benefits our Company across multiple fronts. But most importantly, with an improving economy it strengthens and creates opportunity for the people, companies and investors that we serve. And that opportunity will continue to provide opportunity for us to capture as we connect all our capabilities to help those that we serve realize their financial goals.
At their very core, banks are instruments that help direct money from people who need a place to securely keep it, to others who need it to meet their financial goals, whether it is for personal or business purposes. As the U.S. economy continues to improve, almost all banks are set to benefit, and when you consider that Bank of America is one of the largest banks with an expansive amount of products and service offerings in the United States, it will be one of the biggest benefactors.
3. It's cheap
While things at Bank of America have improved, and will likely continue to do so, one of the key components of any investment consideration is the price of the stock relative to its actual value. For banks, a key measure of this is not price to earnings ratio, but instead price to tangible book value. When you look at eight of the largest commercial banks in the U.S., you'll see that compared to its peers, Bank of America is significantly less expensive on a relative basis:
Sources: Company earnings reports, YCharts.
While no one should invest in a company simply because it is "cheap," Bank of America has been steadily improving its performance to match its more highly regarded peers, and the deep discount it trades at shows the doubts that many still have about the bank. However, when you consider its performance over the last five years in growing its tangible book value, you can see it has bested Citigroup (C 3.06%) by a wide margin, and has almost equaled JPMorgan. It hasn't been able to match Wells Fargo, but the difference isn't nearly as wide as you may expect:
When you consider that the worst is likely behind it, and improved performance is on the way, Bank of America is likely to continue its impressive run of returns, and although it has seen an incredible run in its stock price since last Thanksgiving (up almost 60%), investors in this bank could again be incredibly thankful for its performance next year at this time as well.
