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Should I Buy Bank of America? 3 Pros, 3 Cons

There could still be some big problems with the mortgage business

   

Bank of America 6 300x199 Should I Buy Bank of America? 3 Pros, 3 ConsSure, Bank of America (NYSE:BAC) posted a solid earnings report for the second quarter. Net income came to $2.46 billion or 19 cents a share, up from a loss of $8.83 billion or 90 cents a share in the same period a year ago. This beat the consensus estimate of 15 cents a share. Wall Street, though, apparently wanted more — so far in today’s trading, the stock is off about 2.5%.

Despite this, Bank of America has been a winner for shareholders in 2012. The return is a sizzling 39%.

But is there still more room on the upside? To decide, here’s a look at the pros and cons:

Pros

Banking Colossus. In the U.S., Bank of America serves about 56 million clients — and a distribution footprint that includes over 5,000 retailing banking branches and more than 16,000 ATMs. Plus, Bank of America has a pretty solid international business, with operations in 40 countries.

Restructuring. Just a few years ago, Bank of America’s viability was in doubt. Now, though the bank is in a much better position. BAC has taken tough actions to pare back its costs. In March, for example, it announced 30,000 layoffs. And on its second-quarter conference call, Bank of America said it will reduce $3 billion in costs from its investment banking and trading operations. These moves will help to boost the capital ratios, which will make it easier to pay a dividend.

Loan Quality. It’s starting to show signs of improvement. In the second quarter, Bank of America saw a decline in credit losses by 46% — they are now at the lowest level since 2007. What’s more, the real estate division saw its loss fall from $14.5 billion to $768 million over the past year.

Cons

Mortgage Exposure. Bank of America’s acquisition of Countrywide was one of history’s worst deals. While the firm has made lots of progress dealing with the liability exposure, there could still be more problems ahead. Fannie Mae and Freddie Mac are expected to get more aggressive in getting payouts from toxic loans.

Competition. To find growth, Bank of America will need to take away market share from rivals. The problem is that firms like Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) have had fewer problems — which has made it easier to compete.

Regulations: These have certainly been a drag. For example, new regulations have made it difficult to charge fees — such as on checking accounts — as well as to engage in profitable businesses like proprietary trading.

Verdict

Bank of America definitely faces challenges. There may be more liability exposure for the mortgage business and the U.S. economy continues to be under strain.

Nevertheless, Bank of America has substantially cut its cost structure — making it easier to weather the pressures. Besides, it looks like Bank of America may hike its dividend in 2013, which should be a nice boost.

Oh, and the valuation is still cheap, with the price-to-book ratio at only 0.40.

So, all in all, the pros outweigh the cons on the stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO.  Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/07/should-i-buy-bank-of-america-3-pros-3-cons/.

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