When people are asked about their most hated companies in the world of capitalism, financial institutions are probably at the top of the list. The financial world shows the world that they can build and destroy economies in a blink of an eye. It was proven by the two great moments in the history of the modern world. First, we had the great depression that is widely considered as the most widespread and deepest depression of the 20th century. The great depression began after the fall of stock prices in the US, which became known as the stock market crash of 1929. Second, the great recession that crippled the global economy in 2008. This moment showed everyone that banks could receive record-high bailout packages and raise fees on customers while some default on their financial obligations. The vulnerability and greed of banking and financial institutions can show how far the world's economy can decline. It seems that banks are the root cause of all evil and problems. But as investors, we always look at things in an analytical perspective. When people see chaos, we see opportunity. Will Bank of America (BAC) define that opportunity?
YTD Return %
Bank of America
Bank of America's $13 stock is far from its pre-financial crisis highs in the mid $50s, but shares are up 340% since crashing down in 2009. The most important thing about analyzing a bank is that it is a highly cyclical and economy-based stock. When the economy is down, banks usually take the hardest hit. When the economy grows, the banks blossom. BAC is on its way up again if the economic recovery remains stable. In an analyst's point of view, there is no better time to enter than now. Wall Street analysts predict that it can grow its revenues 53% per year for the next four years.
source: Google Finance
When compared against its two competitors (Citigroup (C) and JPMorgan (JPM)), it seems that Bank of America offers least return in terms of price movement. However, the two banks have gained its traction already while Bank of America was still dealing with some of its post-financial crisis securities and loans from Merrill Lynch. Despite the losses on bad loans, Bank of America is still outgaining the market. BAC's stock price doubled, and in my opinion; there is more to come. BAC posted a 16.55% year-to-date return and 86.01% return for the last twelve months. The company has also been moving in tandem with DJIA, as BAC is just behind by 1.73%.
Profitability and Growth Projections
Because of the company's strong presence in the mortgage industry, BAC might recover a bit more as home sales are at their highest levels since November 2009. If the housing market returns to a healthy level of supply and demand, we can expect BAC to be at the forefront of this recovery. In terms of profitability, the company's return on assets and return on equity stand stable at 0.23% and 2.14%, respectively. The growth percentage of ROA and ROE are acceptable because of the bank's business model. BAC's net income increased by 189% by posting a 4.1Bn income compared to last year's 1.46B. EPS is likely to grow as the bank accumulates more income in the recovering market. Moreover, Bernanke's Quantitative Easing will help the banks stimulate the economy and increase their profitability by increasing the money supply to promote lending and liquidity. Its uptrend growth is supported by the management's commitment in controlling expenses as it closed a number of branches.
Overall, the company has been managing its recovery well. They are doing a good job cleaning bad loans and fixing their reputation as a terrible lender. The surge of their net income serves as an announcement that BAC is back in the financial industry race. The mega-commercial bank's core business fundamentals are dependent on the forces that drive the economy. If the country grows, so will the bank that carries its name. If you believe in America, then you should bank on Bank of America. For long-term investors, we recommend a BUY position in BAC.