Bank of America (NYSE:BAC) is a very prominent institution in national and global finance. The bank has over 51 million consumers and clients. Combined with clever financial management, those consumers helped Bank of America to recover from the brutal 2008 downturn. The company's position with respect to major competitors in the financial services industry, business strategy, growth prospects and current downward pressures on Bank of America stock make it a bargain purchase that will substantially appreciate in the next few years. Even though Bank of America has risen 78% over the last 12 months, company fundamentals warrant an optimistic outlook and a "buy" recommendation.
Company Position in the Financial Services Industry
The Fitch ratings agency recently gave Bank of America a "stable" grade despite the Federal government debt-ceiling issue. Debt ceilings and Federal Reserve decisions heavily affect the financial industry through their impact on prevailing interbank and consumer interest rates. Since Bank of America and much of the financial industry relies on borrowing money for growth, outcomes of the debt ceiling argument can have big ramifications for banks and similar businesses. That Bank of America is rated "stable" in such a politicized and uncertain rate environment speaks volumes to the company's management savvy.
Additionally, Bank of America managed to improve its Basel I and Basel III Tier 1 capital ratios. These ratios must be above a certain minimum and are meant to limit bank credit risk. Bank of America's capital ratio improvement tells investors that it is well-prepared to face an unforeseen economic shock that might sink less stable financial institutions. On the revenue side, Bank of America generated $800M net income in Q2 2013 thanks to increased investment management fees, cheap credit and other large revenue streams from the company's numerous customers.
To enhance the company's appeal with regard to smart cost management, Bank of America cut costs by $3.5B in Q2 2013. CFO Bruce Thompson and the rest of upper management made it clear that the bank's focus is on multiple revenue streams, cost control and a solid balance sheet. As an example of its successful initiatives to maintain shareholder value, the company generated loans and leases totaling $10B. Lastly, management decided to execute stock repurchases totaling about $1B. Considering the above facts, it is not surprising that Bank of America has brought in reliable revenue and investor interest for at least the past year.
Bank of America has a unique management strategy that entails ownership of substantial U.S. and international government assets. These assets provide liquidity for other operations. As of June 30, 2013, the sum total of these assets is valued at roughly $342M. This reserve helps the bank to substantially lower liquidity risk. Such risk is often the bane of financial institutions during stressful recessions. Bank of America has another trick up its sleeve: a "time to required funding" metric. It provides a reliable estimate of how much Bank of America could maintain unsecured obligations using only the aforementioned liquidity reserve. As of the end of Q2 2013, Bank of America could meet its obligations with just liquidity reserves for 32 months.
The key to investing in large and well-known companies like Bank of America is to buy low when the business cycle or short-term news pushes stock prices substantially below what fundamentals warrant. As of now, Bank of America closely matches the company's book value. By contrast, major competitors Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB) are trading at about 1.9 and 2.9 times their respective book values. This presents an opportunity to buy Bank of America at a relative bargain. Recent scandals and lawsuits about residential mortgage-backed securities have also acted as short-term stock price depressors. Though not trivial, these issues are extremely unlikely to present a critical threat to Bank of America's financial strength. Consequently, the temporary stock price dip furthers a good buying opportunity. Furthermore, quantitative easing enacted by the Federal Reserve has resulted in an environment of exceptionally cheap credit. As mentioned earlier, cheap credit is a critical factor in Bank of America's success.
Despite rising by 78% in the past year, Bank of America remains solid. The bank's smart business strategy and multiple, reliable revenue streams will propel Bank of America to new heights in the next three years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.