The banking sector was the prime victim of the financial crisis of 2008 as a majority of the banks lost substantial value. As a result, the regulatory environment was tightened and most of the banks have not been able to regain their pre-crisis levels. However, there have been some positive signs and profitability of the banks has improved considerably in the past two years.
Bank of America (BAC) has performed tremendously over the past two years, and rewarded its shareholders for their patience. Future outlook of the banking industry and global economy suggests that banks will be able to further improve over the next two years. Let's look at the industry and BAC's prospects and performance.
According to the Ernst & Young Global Banking Outlook 2013-14, the biggest concern during the first half of the last year was the uncertainty over the future of the eurozone. At the moment, banks are making an effort toward adopting new strategies and restoring the reputation. As a result of the strict regulatory environment, margins have been severely hit in the banking sector. However, it is also noted that in other parts of the world, like North America and Asia-Pacific, the average ROE among top 40 banks has shown a considerable improvement in 2012. The report also suggests that most banking executives expect the global economic distress to persist for at least one more year.
Furthermore, Deloitte's 2013 Banking Industry Outlook identifies the fiscal cliff as the most important macroeconomic risk factor to the performance of the banking industry. Also, the report identifies 2013 as the year in which the banking regulations are actually implemented by the banks, squeezing their margins. On the other hand, UBS Economic Perspective is less gloomy as the recovery of the US housing market and reduction in private debt along with the increased bank credit have been identified as positive drivers for the banking industry and the economy at large.
Bank of America in Focus
In the middle of these mixed perspectives and scarcity of persuasive optimism with regards to the performance of the banking industry, Bank of America has emerged as an impressive performer. Towards the end of 2011, the stock was trading at $5.56 per share - since then, the stock price has gone up to $12.21 per share. BAC's net income for 2012 has improved massively and it stands at $4.2 billion, compared to $1.4 billion in 2011. This resulted in an improvement of earnings from $0.01 in 2011 to $0.25 in 2012. Furthermore, the estimated earnings for 2013 are $1.01 per share, which is more than four times the previous annual earnings. Total assets for BAC have increased by approximately $81 billion and total loans and leases decreased by $18.38 billion over the last year - deposits also increased by $72 billion.
Despite the profits registered by BAC in the past year, the stock currently trades at well below its book value of $20.24. The PEG ratio of less than one also suggests that the stock at the current price remains undervalued and is therefore a decent investment opportunity.
Bank of America and Peers
BAC has significantly outperformed other major competitors as BAC registers the strongest profits followed closely by Citigroup (C).
These results reflect the relative performance of the four large banks. BAC has been able to outperform its peers due to its resilience in sustaining its market share. The confidence of the board of directors has been further reflected by the announcement of a $10.5 billion stock buyback which includes $5 billion of common stock and $5.5 billion of preferred shares.
Irrespective of the strong regulatory requirements put forth in the post financial crisis period, the banking industry as a whole remains highly sensitive to economic and financial shocks. This is why most stocks from the banking industry operate at a beta of more than 1. Therefore, the performance of BAC is subject to a number of risk factors which are primarily macroeconomic in nature. Most importantly, the variations in interest rates can have a sizable adverse effect on BAC. At this point it is to be noted that according to Moody's, the credit standing of BAC is still way below that of JPM, WFC and Citigroup. Therefore, credit risk and interest rate risk are viable threats to the stock's performance.
The industry outlook suggests that the global economy is set to recover over the next two years. The forecasted improvement in economic environment, along with buyback strategies, the advantage over other counterparts of the banking industry and the low P/B value of the shares are expected to serve as important drivers for the improvement in the stock's value. It also looks like the bank is coming out of its legal troubles and mortgage deals. Hence, even after the price hike experienced in the past year, BAC still remains an attractive option for the long run.