While the financial crisis ended more than six years ago, Bank of America has only recently emerged from under the dark cloud that's weighed on its stock since Lehman Brothers failed in September 2008.
The final piece of the puzzle was slid into place this past August, as the nation's second-largest bank by assets announced a historic $16.65 billion legal settlement with federal and state regulators and law enforcement agencies.
Looking back in years to come, it isn't unreasonable to think that this latest deal, unprecedented in size, will be cited as the final catalyst that sent Bank of America's shares soaring to new heights.
Bank of America's darkest days
It's hard to overstate the damage that the 2008-2009 crisis inflicted on Bank of America. Thanks to its acquisitions of Countrywide Financial and Merrill Lynch, the North Carolina-based bank was exposed to more legal liability than perhaps any other company in the annals of American history.
By my count, the banking behemoth has disposed of 50 legal cases and government investigations over the past six years for a total price tag of $90.6 billion -- and that excludes the billions of dollars paid to lawyers.
To be fair, a considerable portion of this figure consists of non-monetary relief, such as buying back toxic mortgage-backed securities from institutional investors, Fannie Mae, and Freddie Mac. It also includes debt relief and other types of assistance for homeowners and debit card customers, among others.
But regardless of how you slice it, the cumulative impact of these claims has not only consumed the lion's share of Bank of America's earnings since 2008, but at certain times it's even called the bank's very survival into question.
The net result has been a stock that continues to trade for one of the largest discounts to book value in the bank industry.
The road ahead for Bank of America
Although it may be hard to imagine a time when Bank of America will be done atoning for its past misdeeds, and particularly its decision to acquire Countrywide Financial, there is little doubt that the bank is close to doing so.
As expenses come down, which they should now that the majority of legal claims are behind it, more of Bank of America's top line will flow through to shareholders.
Just recently, CEO Brian Moynihan predicted that its efficiency ratio -- which measures the percentage of net revenue consumed by operating expenses -- could fall from its prevailing range of 75%-85% all the way down to the "high 50s." This alone could push Bank of America's share price to nearly $40.
With $90 billion in annual net revenue, which is a conservative figure and assumes that interest rates remain unchanged, the bank should have earnings of roughly $28 billion, or $2.70 per share of common stock. Multiply that by 14 times earnings, a middle of the road valuation for large-cap stocks, and you get a share price of $37.80.
Evidence from Bank of America's past
Even though this may sound too good to be true, there's historical precedent to believe that it's a reasonable, if not probable, outcome.
Throughout the 1980s, Bank of America found itself in the epicenter of economic headwinds that wreaked havoc on its balance sheet and, just as in the aftermath of the financial crisis, led many to question whether it could survive.
A debt crisis throughout the developing world exposed it to billions of dollars in toxic loans. Recession here at home cast domestic borrowers into default. And, to top things off, just like today, a bloated expense base left little room to absorb the losses without raising capital from outside investors.
But not only did Bank of America survive the crisis, finally pulling out of it in 1988, but it went on to thrive. Its regained strength sent its share price soaring to previously unseen highs and positioned the bank to lead the consolidation wave of the 1990s.
Looking back, the parallels are compelling. And while this isn't to say that Bank of America won't find itself in similar straits when the credit cycle inevitably turns against it in the future, it seems safe to assume that savvy investors could get rich in the meantime.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.