Bank of America Corp’s Rally Is Overdone

With growth that's less than outstanding, BAC is not the best in its class

By Luce Emerson, InvestorPlace Contributor

Throughout a somewhat volatile 2017 for what is one of the most heavily regulated industries out there, Bank of America Corp (NYSE:BAC) has consistently been able to keep its head above water. And post-third-quarter earnings, the market has rewarded shareholders for their patience. Shareholders are no doubt in high spirits as the year comes to a close.

In the past three months alone, BAC stock has jumped 12%, pushing year-to-date gains to 21%. This puts its performance well above the overall sector.

The rally early in the year for financial stocks — banks, in particular — didn’t make it past the first quarter, but BAC has managed to outperform even the S&P 500, which is up 16%. To my surprise, BAC has also outperformed my favorite company in the sector, JPMorgan Chase & Co. (NYSE:JPM).

I still maintain that JPM is the best run “big bank” in the business, as long as CEO Jamie Dimon is at the helm. Every business segment looks super strong from consumer business to asset management to the investment bank. And this is despite a universally tough year for trading.

Perhaps with Warren Buffet’s continued support and investment in BAC as its single largest common shareholder, via Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), there will always be some edge from a PR standpoint for retail investors.

BAC’s Third Quarter

The sector as a whole got a mid-year bump of sorts after banks across the board more than met Basel 3 requirements. That indicates that banks are well-capitalized and balance sheets are strong.

But why BAC deserves to trade above the broader industry is difficult for me to discern.

Now, given the YTD growth numbers, I’m not blind to the obvious merits. From a  bottom-line standpoint, consumer banking has grown 14%, investment management 10% and global banking 27%. Global markets were down 9% year-over-year but have been a challenge for all banks.

But looking at tangible book value per share, which I feel serves as a better barometer for bank performance than normal earnings, performance is lackluster — 1% YOY, just barely eking into positive territory.


Loans and leases are up just 2% YOY, compared to average core loans up 7% YOY for JPM. Average total deposits for BAC were up 4% YOY compared to 9% for JPM. One can argue that JPM is operating off a smaller total deposit amount. But ultimately the market will be looking at growth. That growth will inform future earnings which are then discounted back to the present. So, that growth number is still important to compare to peers regardless of what the base amount is.


Returns are similarly lower than JPM. It posted an 11% return on common equity and 13% return on tangible common equity compared to BAC’s 8% and 11%, respectively.

Bottom Line on BAC

So growth seems on track for the $278 billion-market cap company, especially at the net income level for BAC, indicating a healthy bank. But given a simple comparison to a key competitor on certain key metrics, it’s clear that its performance isn’t what one would considered outstanding.

What then justifies the uptick BAC stock has seen over the past few months, that’s had it leading the sector? The dividend hike was implemented in kind by other banks as well. So it can’t be a chase for a paltry 1.8% yield.

Frankly, your guess is as good as mine. What I can say is that going in to 2018, I’d want a more efficient bank with best-in-class returns. And that’s not to be found in BAC.

As of this writing, Luce Emerson did not hold any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2018 InvestorPlace Media, LLC