Bank of America (NYSE:BAC) recently earned the honor of top pan-European equity brokerage for the second straight year at the annual Thomson Reuters Extel Awards on Tuesday. The company's wealth management business with U.S. Trust of Merrill Lynch has seen client balances grow to over $2.4 trillion in the first quarter of 2014.
BAC's Price-to-Tangible Book Value stands at 1.18x, and in terms of that metric, BAC is trading at a relatively cheap valuation compared to other reputable equity brokerage firms, such as JPMorgan (NYSE:JPM), UBS AG (NYSE:UBS) and Morgan Stanley (NYSE:MS). However, despite that, we don't believe that BAC has any material upside from the current price.
Future Prospects of BAC's Wealth Management Business
BAC's wealth management business growth has been driven by record asset management fees. Moreover, the bank is witnessing growing demand from the wealth management customers for other banking products, such as loans and deposits. In the first quarter of the current year, the wealth management business made over $700 million in after-tax profits.
The wealth management business generally performs well during bull markets. We expect that the ongoing bull phase that was started in 2009 will continue for some more time, due to the following macro factors:
- The flood of central bank liquidity worldwide
- Improved outlook for the manufacturing, auto, healthcare and consumer durables sectors
- Low interest rate regime, coupled with a stable-to-deflationary price level
- Higher disposable income in the hands of a certain group of people
According to a study:
Assets under management have seen a significant upswing around the world but these gains have not translated into the top-and-bottom-line growth that wealth managers would expect based on past recoveries. While prospects for wealth management have improved significantly over the last twelve months, wealth managers must learn new rules quickly and adapt their playbook accordingly if they are to capitalize on the continued economic recovery.
As the economic recovery continues to unfold, more and more people will be inclined to capitalize on it. However, as the report suggests, wealth managers have to adapt themselves by learning how to deal with volatility. We believe that BAC has tremendous prospects here, due to its reputation in wealth management, for which the firm has earned the honor of top pan-European equity brokerage for the second straight year.
BAC's Fast-Declining Net Interest Income is Worrying
A bank's future potential can be measured by tracking its net interest income, the difference between the revenue that is generated from its assets and the expenses associated with paying out its liabilities. Since the beginning of 2011, BAC's net interest income has been falling steadily, along with other banks, such as Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC). But for BAC, it is falling more rapidly, which is definitely a worrying sign.
BAC executives said, "Expect net interest income to fall in Q2 before rising in second part of the year." But we would prefer to wait on the sidelines and see if it really rises, before deciding whether to buy the stock or not. We expect that the negative trend will continue, due to the end of the mortgage refinancing boom, which is expected to hit BAC's consumer real estate services business. Continuing litigation expenses are also expected to negatively impact the bank's profitability.
Despite Bank of America's wealth management business continues to thrive, its profitability is expected to be hit primarily by loan losses. Currently, we remain neutral on the stock.
Business relationship disclosure: The article has been written by a BB Research stock analyst. BB Research is not receiving compensation for it (other than from Seeking Alpha). BB Research has no business relationship with any company whose stock is mentioned in this article.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.