It is almost impossible to ignore Bank of America (BAC) when it comes to the financial sector of the biggest economy in the world. Bank of America is one of the world's largest financial institutions with a consumer base of about 51 million. The company has made an impressive recovery since the financial meltdown of 2008. Some of the participants of the financial services industry are still lingering. However, BofA is on the road to recovery and the company is set to grow. The overall conditions of the financial services industry are getting better and BofA has taken full advantage of the recovery. The stock has gained over 78% during the past twelve months, and is the top performer in the financial services industry.
Financial Services Industry and BofA
The financial services industry has been hit the most by the on-going debt-ceiling crisis in the U.S, but Bank of America has managed to recover with the economy in the last 2 quarters with a stable credit outlook (Fitch ratings) and improving the regulatory Basil 1 and Basil 3 Tier 1 common and capital ratios. Moreover, Bank of America generated record investment management fees in the second quarter, amounting to a record quarterly net income of $0.8 billion and a pre-tax margin of 27.6%, driven by strong revenue performance and reduced credit costs.
The fact that BofA has also cut expenses by $3.5 billion in just a quarter is also quite commendable. The company's CFO Bruce Thompson was of the view that the bank has worked on its three core measures of performance, namely, revenue stability, balance-sheet growth and cost management, which is quite a fact if one assesses the most recent earnings report. Loans and leases increased by $10 billion and $1 billion worth of stock repurchases, adding to the beauty of the balance sheet along with the net interest yields improving, clearly showing an uptrend in the revenue stream in at least last 4 quarters.
Long-Term Growth Prospects
As far as the long-term growth perspective is concerned, the company follows an ingenious mechanism by maintaining asset resources in the form of both U.S government and selective non-U.S government securities, with which they provide the parent company with high liquidity namely "Global Excess Liquidity Sources." These sources are valued at $342 billion as of 30th June 2013 and are especially effective in stressed times mitigating a major chunk of liquidity risk, which is normally faced by a financial institution of this stature. Another measure used by the company is the "time to required funding", which in essence relates to debt coverage and indicates the number of months the parent company can continue to meet its unsecured contractual obligations as they come due only by the use of "Global Excess Liquidity Sources." This measure currently shows that the company can meet its obligations for a period of 32 months if only funded by the aforementioned liquidity source which is quite impressive.
Attractive for Investors?
Good companies attract investors but their goodness is already reflected in the prices of their stocks and to generate value, one has to buy low and sell high. Among the too-big-to-fail tier, Bank of America stock is still trading at around its tangible book value compared to 1.9 times for Wells Fargo (WFC) and 2.9 times for US Bancorp (USB). The recent news about the fraud over the sale of $850 million worth of RMBS (Residential Mortgage-backed securities) further drove prices down, offering another opportunity to investors to add to the position. In my opinion, Bank of America offers a good store of value in the foreseeable future. Moreover the historically loose monetary policy consisting of the asset purchase program by the Fed (more commonly known as QE) and the exceptionally low interest environment plays a vital role in the future of this stock apparently expediting its journey north.
The stock has appreciated a great deal over the past twelve months, which might suggest that there is little room for further growth. However, the solid condition of the balance sheet and the future prospects indicate that there is still substantial room for the company to grow. I believe BofA is still an attractive long-term investment and the stock should appreciate substantially over the next three years.