In the aftermath of the financial crisis, nearly every major bank has recovered, both as companies and with respect to their stocks. But Bank of America Corp (NYSE:BAC) taken the same path — or more accurately, why has BofA been walking the path while its peers have been running? And what can we expect from Bank of America stock going forward?
BAC stock closed Thursday’s trading at $18.76. Sure, that’s its highest price since the financial crisis … but it’s still far off its all-time high of $53 in 2006.
If there are any clues, they might be in Bank of America’s actual performance metrics. So, let’s take a look at recent earnings to see if there are any problems there.
Bank of America’s Books
Bank of America recorded net income of $4.96 billion on revenue of $21.6 billion for its fiscal third quarter. Those profits were up 11% year-0ver-year, while revenues were better by 3.5%. Both figures beat Wall Street estimates.
When we drill down, we find great news all around. Net interest income grew 3% to $300 million. Investment banking fees exploded 13% to $1.5 billion. Bank of America is a big player in sales and trading, so it generated $3.6 billion (a 14% improvement) in that division.
Tangible book value came in at $17.14, so obviously the stock price is trading where it should be in that regard. Global banking rose 22% and global markets grew 34%.
All of this is great news, so … why the lag?
I figured it might be the balance sheet, but there’s not much wrong there, either. BAC boasts $2.195 trillion in assets, of which $905 billion are loans and $1.23 trillion are deposits. So it’s got plenty of liquidity. Long-term debt is $225 billion, so it has leveraged that debt by 4-to-1 to make loans with.
I’m not thrilled with BofA’s $12 billion in loan loss reserves. But considering it’s only 1.3% of total loans, that’s pretty darn good.
What About the Business?
On a macro basis, the trends are all looking bright. Deposit growth, loans and leases, brokerage assets, mobile banking users, and margins are all improving. First mortgages jumped to $20.4 billion, up by $3.6 billion. Meanwhile, consumers around the country continue to take on debt. Bank of America issued 1.3 million new credit cards, up 5%.
I just find all of this mystifying. Bank of America is …
- No. 1 in market share for retail deposits.
- No. 1 in home equity lending
- No. 2 in small-business lending
- No. 3 in U.S. credit card balances.
The fact that BAC stock is 60% off its all time high seems so very odd, but I think we can chalk this up to a few things:
First, take a look at shares outstanding: 10.12 billion! I can’t think of a stock that has more. General Electric Company (NYSE:GE) is close at about 9 billion. But even The Coca-Cola Co (NYSE:KO) only has 5 billion.
It was different when BofA was just a $5 stock, but at nearly $19, we’re getting to the point where it takes tons and tons of buying to push the stock up. In fact, Bank of America itself is the biggest buyer of its own stock — sometimes as many as 50 million shares per month.
The second problem has to do with Bank of America being listed as a “Systemically Important Financial Institution.” That means the Fed is all over it, all the time. So BofA is repeatedly subject to stress tests. It has to meet these tests and beg and cry to pass on dividends to shareholders.
The downside is that BAC stock only yields 1.76%, and that crappy yield has no interest to income investors. They all hold other financial stocks that provide far better dividends.
The good news, though, is that means that money that can’t be paid out as a dividend is locked away in a vault, which means Bank of America’s book value will rise. Share price will follow tangible book value, as it appears to be doing.
So I think we’re looking at an undervalued stock in BAC. It’s worth buying now, especially on the recent breakout.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
