The financial sector is cheap in general right now, but some stocks have outperformed their peers significantly. One of these cases is Bank of America (BAC -0.18%), whose shares are up about 40% in the past year. Compare that to other big banks such as Citigroup (C 0.38%) and JPMorgan Chase (JPM -0.54%), which are up by 13% and 18%, respectively, and it is only natural to question whether or not B of A is still worth buying, or if new investors missed the boat.
In the search for answers, let's take a look at a few things that were said during the bank's recent earnings call to see why the stock has performed so well and where it may be heading in the future.
Return of capital
One of the best indicators that a bank has begun to truly recover from the financial crisis is being approved to return capital to its shareholders. Basically, federal regulators must approve a bank's plan and also must agree that the bank's current financial state warrants a buyback, a dividend increase, or both.
In Bank of America's case, the company announced that it had repurchased 92 million shares during the fourth quarter of 2013. While this sounds pretty small considering the company has more than 10 billion outstanding, it does represent an annual buyback rate of about 3.5% of the total shares (or more than $6 billion worth), indicating it is in much better shape than a lot of its peers.
For comparison's sake, Citigroup is buying back shares, but it is not really a return of capital. The $1.2 billion buyback plan is meant to counteract the effect of shares awarded to executives as part of their compensation, and hence will not produce a net increase in value for shareholders. JPMorgan is currently executing a $6 billion buyback program, but it is "conditional" and may be reduced or suspended because of all the fines the company has been paying out.
Higher revenues, lower delinquencies
In the fourth quarter, Bank of America's net interest income rose by $520 million from the previous quarter, driven mainly by trading-related income and lower long-term debt levels (which dropped by about $6 billion this quarter). The company also earned more in interest income, with a net interest yield of 2.51% for the quarter, up from 2.4%.
Expenses also dropped, falling by $300 million from the third quarter, and by $1.4 billion from the same period in 2012 (excluding litigation). Legacy assets are also being wound down, and the amount of charge-offs has dropped considerably, which has allowed the bank to release $1.1 billion in reserves that has been set aside to cover bad asset losses.
The brokerage is improving at a fantastic pace
As the stock market improves, the investment banking divisions of most of the big banks have seen revenues rise, and Bank of America is no exception. When the market goes up, account holders' assets are worth more, so the assets under management increase significantly. This fact, combined with the trend of cash leaving the sidelines and flowing into brokerage accounts, has produced a 26% increase in B of A's brokerage assets since the end of 2012.
A brief summary of Bank of America's current state
According to the company's Chief Financial Officer, Bruce Thompson, the bank's capital and liquidity have never been stronger. The company's investment management business had a record year, as did global banking.
Also, the majority of the company's legal troubles are now in the rear view mirror, with Fannie Mae and Freddie Mac settlements done. B of A has also settled its liabilities related to its Countrywide acquisition for $8.5 billion. In all, the bank has agreed to settlements totaling around $45 billion in efforts to put the financial crisis behind them. Aside from the possibility of appeals in some of their completed cases, the major litigation seems to be over.
With vastly improved credit quality and an excellent growth rate in their core businesses, maybe Bank of America is worth paying a bit more for than its peers!