It’s been brutal for shareholders of the big banks. Over the past year, the shares of JP Morgan Chase (NYSE:JPM) have fallen by 5.3% and Wells Fargo’s (NYSE:WFC) stock has dropped by 10%. During the same period, the S&P 500 climbed 11.11%.
However, the worst performance has come from Bank of America (NYSE:BAC). The 12-month drop in the stock is an awful 34%.
And based on the latest quarterly report, the prospects still look bleak. The company posted a profit of $2.05 billion, which was down from the $3.18 billion earned last year. Revenue was off by 16%.
Despite all the negative news, Bank of America still has some promise. So here’s a look at the pros as well as the cons:
Pros
Improved economy. As its name implies, a big part of Bank of America’s business is in the U.S. Thus, the improved economy here is making a difference. For example, in the past five months, the bank has seen the default rate on credit card debt fall. It’s actually at the lowest rate since November 2008.
Focused on restructuring. Until a few years ago, Bank of America was an aggressive acquirer. Of course, now the company has stopped the deal-making and is working hard on integrating the far-flung operations. Over time, this should provide for more earnings power.
Bank of America also recently hired Gary Lynch, who is a former Securities and Exchange Commission lawyer. He has a bigtime reputation for dealing with complex legal matters. This will be a big help in light of Bank of America’s litigation exposure.
Investment banking. There is one mega-acquisition that has worked out for Bank of America — the purchase of Merrill Lynch. With the deal, the bank now has a much stronger offering of high-end investment products. There should also be more growth in corporate advisory work as well as wealth management.
Cons
Leadership problems. Last week, Bank of America’s chief financial officer, Chuck Noski, unexpectedly left his post. He said it was for personal reasons (a family member is ill), but the departure of a CFO is often disruptive, and Noski was in the position for less than a year.
The dividend. Investors in Bank of America want a heftier dividend. But when the firm applied to the Federal Reserve for an increase, the request was rejected. In other words, it’s a sign that the bank still has many problems to sort out and needs to preserve its capital base.
Mortgage mess. By far, Bank of America’s acquisition of Countrywide Financial was a disaster. It greatly increased the bank’s exposure to the mortgage business at the wrong time.
In the quarter, the business posted a loss of $2.4 billion. Bank of America has had to take charges for foreclosures, buybacks of mortgages and legal settlements.
Verdict
Bank of America is the country’s largest bank, in terms of assets. It also has scale across key businesses in the financial services industry. But it will take time to make them mesh together and create synergies.
But perhaps the most notable problem is the mortgage business. Looking at the latest real estate numbers, the industry is still experiencing lower housing prices and persistently high foreclosure rates.
When considering these factors, the cons outweigh the pros on this stock.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
