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Bank of America Finally Made Everyone Happy

By Anh HOANG – Jan 27, 2014 at 7:27AM

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Despite the huge fine from mortgage loans originations, Bank of America could continue to deliver shareholders sweet returns over the long run. It's still trading much cheaper than both JPMorgan Chase and Wells Fargo.

Bank of America's main New York office at 1 Bryant Park.

Bank of America (BAC 0.24%) had just about everyone smiling ear to ear when it recently reported an impressive operating performance for 2013.

Right after the earnings announcement, its share price shot up significantly to more than $17 per share (shares sat around $5 just a few years ago). Despite the boost, Bank of America, at 0.83 times its book value, is still valued much cheaper than its peers, including JPMorgan Chase (JPM 0.19%) and Wells Fargo (WFC 0.23%). Is it a good buy now?

B of A's corporate headquarters on the left. Source: James Willamor.

Finally turning the ship
For the full year 2013, Bank of America managed to issue more than 3.9 million new consumer credit cards and generated as much as $3 billion of earnings in Global Wealth and Investment Management business.

All of that helped more flow to the bottom line. Net income jumped from $4.2 billion to $11.4 billion.

Bank of America closed 2013 with the strongest balance sheet position, with a Basel 1 Tier 1 Common Capital ratio of 11.19% and Basel 3 Tier 1 Common Capital ratio of 9.96%. The bank has also returned cash to its shareholders via both share buybacks and dividend payments.

It has bought back around $3.2 billion worth of shares at an average price of $13.90 per share. At the current trading price, Bank of America offers investors a very low dividend yield, at 0.20%, with a very low payout ratio of only 3%. Thus, most of its cash returns to shareholders were executed via share repurchases. 

Those worried about more big loan losses need not to. Bank of America has set up a huge loan-loss reserve for mortgage-related costs. And now that performance has been improved significantly, its provision for loan losses plunged from $1.9 billion in the fourth quarter 2012 to only $336 million at the end of 2013. That means more money can make its way to shareholders.

Looking forward, the bank would focus on several areas including capital generation, cost reduction, increased risk management, and addressing current legacy issues.

Although the recent results are pleasing investors for the moment, Bank of America needs to keep delivering improving results in the near future.

President and CEO Brian Moynihan commented that the bank has not achieved its true earnings potential yet. By 2016, it sets the goal to double its return on equity from 7% last year to 14%. 

Legal risks worry investors
The only thing that might concern investors is the huge regulatory risks Bank of America is still facing with mortgage fines. The bank has spent as much as $50 billion worth of settlements since the financial crisis. Last year, it had to pay around $10.4 billion to settle disputes over loans that were guaranteed by Fannie Mae. More payouts may be around the corner, but Bank of America has a hefty cash pile reserved to handled any anticipated payments.

Is the stock a good buy today?
At the current interest environment, if any bank could generate around 12%-14% return on equity, it could trade closer to 2 times its book value. Wells Fargo, Warren Buffett's favorite bank, is the best-performing bank, delivering nearly 13.5% return on equity, and valued at 1.57 times its book value. In the long run, with the global leading position and a competent, talented CEO, Bank of America could significantly enhance shareholders' value. 

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bank of America Stock Quote
Bank of America
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JPMorgan Chase Stock Quote
JPMorgan Chase
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Wells Fargo Stock Quote
Wells Fargo
$47.44 (0.23%) $0.11

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