Shareholders in Bank of America Corp (NYSE:BAC) have traveled a bumpy road since the Great Recession. The megabank has had to deal with numerous lingering issues since the credit crisis, from fallout of its $40 billion buyout of Countrywide to capital ratios and weak profitability. As a result, BAC stock has for some time been a middle-of-the-road financial pick.
At least, it was until recently.
Bank of America stock has caught fire over the past month or so. Shares of BAC have surged by more than 33% in the past month alone, and they recently eclipsed their pre-crisis highs of $22 per share.
But what has changed? And is the money center behemoth finally worthy of your investment?
Bank of America has plenty going for it, but plenty of black spots as well. So should you buy BAC stock? We look at three pros and three cons.
Pros of BAC Stock
Higher Interest Rates Are Coming: Perpetually low interest rates haven’t just hurt savers — they’ve hurt big financial stocks like Bank of America, too. The problem is that they keep net interest spreads low. When rates rise, BAC and other banks benefits as the rates they charge on longer-dated loans (think mortgages) increase at a faster pace than the rates it pays on short-term deposits. The difference is profit.
As one of the largest issuers of home mortgages and auto credit, Bank of America is positioned to seriously benefit from the Federal Reserve’s decision to normalize rates. BAC will see higher profits when it’s able to charge more for loans, and meanwhile, it’ll have a steady stream of new capital to make those loans as savers are once again drawn to money market accounts and CDs.
Trump Bump: The term “Trump Bump” keeps getting tossed around by market pundits to describe President-elect Donald Trump’s policies designed to reduce regulation and push up the economy. And it’s a very real thing. As one of the largest financial institutions, BAC is one of the main targets of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Rules on proprietary trading, consumer loans, “swaps push-out rules” … BAC stock is subject to them all.
Trump and his team wanting to remove or at least change pieces of Dodd-Frank is a net positive for BAC. Not only will it allow BofA to return to business as usual, but Bank of America won’t have to spend billions of dollars complying with restrictive rules.
Big Dividends Coming: Perhaps one of the most compelling reasons to buy Bank of America stock is that the shackles have been taken off its dividend. After the recession, the dividend on BAC stock was reduced to just a penny. However, Bank of America toed the line and in 2014 was finally allowed to improve its dividend once more. Since then, Bank of America has increased its payout by more than 650%. At just 8 cents per share, BofA still yields just 1.3%, but the trend is a promising one.
Cons of BAC Stock
BofA Might Be Too Expensive: For bank stocks, metrics like price-to-earnings ratios aren’t always the best measures of valuation. That’s because banks are a complex pile of assets, assets masking as liabilities and other things. One better measure is price-to-tangible-book-value — basically what an investor would get if the bank liquidated everything and returned all the money to shareholders. The recent rise in BAC stock has pushed that ratio up to 1.32, meaning it trades at a 32% premium. That figure was just 0.82 (a discount) at the end of June. By contrast, JPMorgan Chase & Co. (NYSE:JPM) is trading at 1.65 times book … but that’s for more growth potential and better earnings than BofA.
Housing Still Stinks: You can make the argument that Bank of America was forced to buy Countrywide during the recession, but either way, BAC is now one of the largest issuers of mortgages in the country. While that’s great for profits as interest rates rise, it’s still a problem because the housing market, while recovering, still isn’t screaming. Higher credit standards, bigger down payment requirements and other issues have pushed more people into renting than buying. That’s a problem for any bank that has a large mortgage business.
Declining Revenues: Perhaps the biggest reason to avoid BAC stock is its declining revenues on the whole. The bank’s image took a massive hit during the recession, and many customers have simply moved on, whether that was to other big banks, or regionals and credit unions. This isn’t just in mortgages, either. Millennials, for instance, continue to look at fintech firms rather than the bigger financials for their banking needs.
That’s not a huge deal up front, when you’re talking about low-dollar savings accounts — but those are the very people they’ll be trying to target later on for auto loans and mortgages. If Bank of America isn’t getting enough customers through the doors, the Trump Bump will be a temporary tailwind.
Verdict
The long-term outlook for Bank of America looks pretty rosy, with plenty of growth potential. But in the short-run, shares might have gotten ahead of themselves, especially considering its revenue situation and other issues.
Right now, investors might want to put BAC stock on their watchlist until it gets cheaper, or buy one of its better-growing rivals.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
