Bank of America (BAC) has been showing robust growth since November 2013, and in the last three months, the stock has grown by roughly 20% while its peers JPMorgan (JPM) and Citigroup (C) grew only 6% and 1%, respectively. However, this growth in stock price has already happened and is in the past. I am more inclined to focus on the future value of the company based on its performance. Also, I will be comparing the performance of Bank of America with its competitors to find which one is the best positioned to grow.
Reasons to buy BAC
Bank of America has been performing well and has recovered fast after the financial turmoil of 2008. In fact, in some aspects, it is ahead of its peers. To start off, let us first take a look at total loans-to-total deposits ratio. This is one of the key ratios to assess the performance of a bank. Deposits are a liability of a bank, while loans are the assets. This ratio needs to be enough to generate income for the bank so that it can pay off its debts to the depositors. However, there should be a little room between the two as well to maintain solvency should the bank face sudden withdrawal. Following is a table showing total loans-to-total deposits ratio for BAC and its two peers.
Total Loans-to-Total Deposits
Source: SEC Filings
As we can see from the table above, Bank of America is ahead of the other two banks by a considerable margin. In simple words, it means that Bank of America is generating revenue on 84% of its deposits by loaning them further, while maintaining 16% of the deposits to secure its solvency. The other two banks are behind on this ratio. Another important reason why this ratio needs to be higher is that on each deposit or savings account, the bank has to pay interest to the depositors. This means that the bank is already incurring cost on the deposits. If it does not loan it out to the optimum level, its profits will decrease.
Another key term of banking is tangible book value per share. Tangible book value determines the assets of the bank excluding all its liabilities and all the intangible assets like goodwill and patents. The term defines the bank's actual worth per share should the goodwill go down and the bank liquidate. Tangible book value is compared to the actual price of the share to compare if the stock is trading at a discount or a premium.
Tangible book value per share
Source: SEC Filings
As shown in the above table, Bank of America is trading at a premium of 22%, while JP Morgan at a premium of 39% and Citigroup at a discount of 11%. Generally, if we look at the figures, we would find that Citigroup is the cheapest here. However, it should be kept in mind that Citigroup was trading at less than 50% of its book value only two years ago - while the stock has made substantial recovery over the past two years, it is still trading at a discount to its tangible book value. On the other hand, Bank of America has made up that loss and the stock is continuing to grow rapidly. Another important reason for Citigroup to be trading at this discount is the recent pullback, which has resulted in widening the discount. Comparing Bank of America and JPMorgan, the former is clearly cheaper than the latter by a 17% difference.
After taking into account the performance and the tangible book values of the three banks, I believe Bank of America has the biggest potential to grow. Citigroup's tangible book ratio may indicate the stock is cheaper, but we need to keep in mind the recent pullback as well as the massive drop in value during the credit crunch. As I have mentioned above, Bank of America is using its assets most efficiently, while maintaining a good buffer for the liquidity needs. In other words, the bank is efficiently using its deposits to make money. For a detailed analysis of the bank's recent financial performance, please follow this link and I have talked about its major risks in this article. In this article, I specifically wanted to focus on these two metrics and wanted to compare these banks. I believe Bank of America is the best-positioned stock in this group to grow over the next two to three years.