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Summary

  • Bank of America's "Safe Balance" initiative is aimed at enhancing long-term revenue while charging a monthly fee of $4.95 on low balance checking accounts.
  • "Safe Balance" looks to combat against account holders incurring overdraft fees that could reach as much as $35 per transaction.
  • Bank of America's recent trend behavior signals a buying mode for most long-term investors.

When it comes to investing in some of the bigger banking names potential investors are always interested in how these banks plan on enhancing their long-term revenues. With that said, I not only wanted to take a look at Bank of America's (NYSE:BAC) most recent revenue generating initiative, but also highlight a number of reasons behind my decision to stay long on its shares.

BAC's Recent Initiative To Enhance Long-Term Revenue

On Thursday, March 6, Bank of America announced its latest effort to enhance its long-term revenue as it introduced a new program known as "Safe Balance". "Safe Balance" was designed to create a consistent stream of long-term revenue while simultaneously lowering some of the bank's costs. It is also aimed at cutting out much of its previously criticized fees by introducing a monthly fee rather than a per transaction fee. In other words, users who tend to keep a low balance in their accounts will now be charged $4.95 per month to avoid over-drafting rather than $35 per transaction each time an overdraft had occur. I strongly believe that this initiative will create a consistent stream of long-term revenue, while allowing Bank of America to retain a large portion of its customer base that may have considered going elsewhere due to the bank's high overdraft fees.

Why Prior Initiatives Failed

As many shareholders and potential investors already know, this isn't Bank of America's first go-around at charging its account holders fees in an effort to generate additional revenues. According to Shayndi Raice of the Wall Street Journal, Bank of America's efforts in both 2011 and 2012 fell short of going over well with both customers and regulators.

"In 2011, the company discussed charging monthly fees to a wide number of customers who used debit cards. But amid complaints, the bank abruptly canceled the plan later that year. The bank in 2012 also shelved plans to offer new checking-account fees as regulatory scrutiny persisted".

Why This Initiative Seems Much More Favorable

After facing both consumer-related and regulatory-related backlash with regard to its first two initiatives, I strongly believe Bank of America got it right this time when it established a standardized fee structure under its "Safe Balance" initiative. Why? The low monthly fee makes pretty good sense from both a regulatory and consumer perspective, especially since the company's efforts in 2012 called for a fee range of $9.00-to-$25.00. Most consumers who live paycheck-to-paycheck with only a few hundred dollars left aren't worrying whether or not they'll be hit with a $35 overdraft penalty.

Recent Performance & Trend Behavior

On Friday, shares of BAC, which currently possess a market cap of $184.27 billion, a forward P/E ratio of 10.70, and an annual dividend yield of 0.23% ($0.04), settled at a price of $17.33/share. Based on its closing price of $17.33/share, shares of BAC are trading 4.32% above their 20-day simple moving average, 4.90% above their 50-day simple moving average, and 17.09% above their 200-day simple moving average. It should be noted that these numbers indicate both a short-term as well as a very strong mid-to-long-term uptrend for the stock, which generally translates into a moderate buying for most near-term traders and most long-term investors.

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Comparative Ratios Set Bank of America Apart From Several Of Its Peers

When comparing sector-based peers, there are two of the key ratios I like to examine and they are a company's forward P/E ratio and a company's PEG ratio. In the first comparison we can see how Bank of America stacks in terms of its most recent forward P/E ratio and in the second comparison we can see how well Bank of America stacks up in terms of its PEG ratio.

Table #1 - Comparative Forward P/E Ratios

As of Friday's close BAC's forward P/E ratio of 10.70 was much better than the forward P/E ratios of both Wells Fargo (NYSE:WFC) (forward P/E ratio of 11.28 as of 3/7) and Bank of New York Mellon (NYSE:BK)(forward P/E ratio of 12.38 as of 3/7) were considerably higher. A stronger forward P/E ratio clearly signals a greater level of affordability when compared to the shares of both Wells Fargo and Bank of New York Mellon.

Company

Price

Forward P/E

Variance Compared To BAC

Bank of America

$17.33

10.70

0.00

Wells Fargo

$47.95

11.28

0.58

Bank of New York Mellon

$33.51

12.38

1.68

Table #2 - Comparative PEG Ratios

As of Friday's close BAC's PEG ratio of 0.94 was much better than the forward P/E ratios of both Wells Fargo (PEG ratio of 1.29 as of 3/7) and Bank of New York Mellon (PEG ratio of 2.92 as of 3/7) were considerably higher. A stronger PEG ratio clearly signals a greater level of value when compared to the shares of both Wells Fargo and Bank of New York Mellon.

Company

Price

Forward P/E

Variance Compared To BAC

Bank of America

$17.33

0.94

0.00

Wells Fargo

$47.95

1.29

0.35

Bank of New York Mellon

$33.51

2.92

1.98

Conclusion

For those of you who may be considering a position in Bank of America, I strongly recommend keeping a close eye on the company's near-term trend performance, long-term dividend behavior and its ability to continue to enhance its long-term revenue through the continued implementation of various types of fee-based initiatives (such as "Safe Balance"), as each of these factors could play a role in the company's mid-to-long-term growth.

Source: Bank Of America Looks To Enhance Long-Term Revenue, Here's Why I'm Long