This has already been a rough quarter for big bank stocks, and March has only just begun. The pain from China’s stock meltdown, the oil crisis and negative interest rates hit global banks hard. Some might say it hit them in their proverbial soft spot — i.e. their trading activity.
Then this news should come as no great surprise. It seems that Bank of America Corp (BAC) might be taking precautionary measures and could begin laying off staff. Is this just the first brush stroke of a rather stark picture that could send BAC stock into an even deeper plunge? Or is BAC stock ready to weather the storm?
BAC Stock — Ready for the Storm
On the surface, the news that Bank of America is planning to cut more than 5% of the headcount in its trading and investment banking division sounds bad. Then combine that with negative news from peers, i.e. JP Morgan Chase & Co‘s (JPM) investment banking arm is forecasted to be hit with a 25% fall in its revenues. Barclays PLC (ADR) (BCS) and Deutsche Banks AG (USA) (DB) announced layoffs after their capital fell to dangerously low levels. Well, then the BAC stock news sounds even more negative.
But for BAC stock, the situation may not be as bad as it sounds. In fact, those massive job cuts in BofA’s trading division might be part of CEO Brian Moynihan’s plan — his grand scheme to trim the fat and reduce the bank’s cost base.
BofA has already cut more than 10,000 personnel and Moynihan has reiterated that it is his long-term plan to gradually make the bank leaner. The current woes, in fact, are a great leverage for BofA’s management to restructure the bank into a simpler, leaner company.
That assumption seems even more probable when analyzing the BAC stock value at risk, or VaR. Essentially, VaR measures the risk a bank takes on average in its trading activities. As BAC stock earnings suggest, VaR levels have been significantly reduced over time.
Why is that important? Because when the bank takes less and less risk in its trading, it’s signaling a shift towards lower trading activity. And lower trading means less staffing is required. In other words, the bank had already been preparing to scale back its trading activity.
It also suggests that the risks to the bottom line are perhaps less grave because the bank was preparing for a hit.
All of which point to the fact that BofA was ready for the blow. The latest layoffs, then, are not an emergency move but rather orchestrated cost cutting.
On top of this, BAC stock has another, more significant cushion of safety. And that is its massive deposit base of roughly $1 trillion (including all divisions), currently among the biggest in the U.S. And unlike Barclays or Deutsche Bank, BofA has the much more resilient U.S. economy to lean on.
When crunching it all together, we get the picture of a cost-disciplined bank with a strong base to lean on. That suggests that BofA can certainly weather the storm.
So Is BAC Stock a Buy?
Click to Enlarge One might conclude that if BAC stock is so well positioned to weather the latest woes hitting bank stocks, it must be a good stock to hold. While that might be true in the future, presently, that’s not the case. Here’s why:
BofA’s deposit base is among the top three in America but still its net interest margin (NIM) is 2.1%. That is still lower than its peers such as Citigroup Inc (C), which has a NIM of 2.9%, and even lower than JPM, which has a NIM of 2.2%.
The steady cost cutting might eventually allow BAC stock to be on par with its peers. But progress is slow and there are faster horses to bet on. Rather, the strategy for BAC stock is to sit on the fence and keep it on the radar.
Wait for BofA’s cost cutting efforts to yield a more tangible impact on profitability in its core banking business. Only then will BAC stock be worth buying.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
