Several months ago I wrote this article suggesting the purchase of shares of Bank of America (BAC) as well as CitiGroup (C). At the time, Bank of America was around $5.00/share and Citigroup was about $26.00/share.
While my conviction remains the same now, the last 5 months have seen some fluctuations in PPS in each but you would still be somewhat ahead in each stock if you had purchased the shares at the time of the article.
That being said, and of course hindsight is always 20/20, I believe we are seeing another strong buying opportunity in both Bank of America and CitiGroup shares. I also believe that Bank of America offers the most potential for capital appreciation.
Why Bank Of America
The cloud over Bank of America's head has not lifted completely but it has come a long way from just a few months back when the bank was attempting to charge fees on their debit card use. The uproar it caused forced BofA to back track and move full speed ahead in repairing the public relations fiasco.
I announced on March 23rd that Bank of America was unveiling a test program for homeowners in trouble. This article highlights the details of the program and it has now been officially launched.
In a Los Angeles Times news report the program has begun as of now in some key States:
Bank of America is testing a mortgage-to-lease program in four states. The idea: Instead of evicting homeowners who face foreclosure, it lets them stay as tenants and sells the homes to investors.
Obviously California is a big one and if successful will probably be rolled out in many more States than just four.
Unable to qualify for modifications on Bank of America mortgages, a few of California's most distressed homeowners are being offered one last chance to stay in their homes: Become renters instead.
Testing a mortgage-to-lease program in the Golden State, Bank of America Corp. sent 300 letters this week inviting borrowers without other options to apply. An additional 1,500 letters will go out in the next few weeks as BofA - which also is testing the program in three other states - evaluates whether a national rollout is feasible.
BofA plans to sell the homes to investors. It typically would recoup far less than what's owed but would come out far ahead compared with where it would be after evicting borrowers, making "cash for keys" payments to help them move and selling empty and often vandalized foreclosures in the troubled housing market.
Not only is this move consumer friendly and economically friendly, but it also could have major impact on the balance sheet. Taking these properties off of the distressed asset (liability) column and potentially placing them into a positive asset class.
That is a major turnaround if this program works, and in my view, why wouldn't it?
Another major consumer friendly approach Bank of America has taken is the advanced ability by mobile devices to interact with the bank easily, securely, and efficiently. Bank of America has basically led the way and has surpassed the 10 million user mark which is far and away the most of any bank in the world.
This article details the success of the mobile bank-on-the-go market sector:
More customers choose Bank of America to bank on-the-go than any other bank. Over 10 million Bank of America customers are now using mobile banking, representing growth of nearly 3 million active users over the last 12 months.
At this rate, the numbers should grow exponentially and the effect that this type of service will have on Bank of America's balance sheet cannot be understated.
The number of branches can be reduced, the number of employees and other higher costs can be eliminated, and higher margins on the bottom line could be enormous. Further enhancing their balance sheet for shareholder value and growth.
The article continues;
Bank of America was among the first to launch mobile banking and continues to lead the industry in developing new capabilities to meet customer demand for new mobile technologies. The bank was the first financial institution to launch an app for Apple, BlackBerry and Android devices and the only bank that has deployed a tablet-specific app for all three platforms: Apple(R), Kindle(TM) and Android(TM).
Obviously other banks will follow suit, but BofA has a commanding edge and can only get better from here.
On another note, earnings of all banks have been on the rise as reported here, and have reached levels not seen for more than 5 years. While overall lending is down, and as much as we hate to admit it, that fact actually helps banks balance sheets, profit margins, and lowers their levels of risk. Making money has not been this easy in a very long time for the banks. When they do not need to lend to make money, it makes for future growth that much more obvious when they do take on more risk by lending.
Here is an eye opening statistic from that same article:
Banks with assets exceeding $10 billion accounted for most of the earnings growth in the January-March period. While they make up just 1.4 percent of U.S. banks, they accounted for about 81 percent of the earnings.
Those banks include Bank of America Corp. (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and Wells Fargo & Co. (WFC) Most of them have recovered with help from federal bailout money and record-low borrowing rates.
That statistic alone should give everyone a clue as to the potential for the banking sector, and in particular Bank of America in my view.
Banks are starting to take in more money this year. The industry posted a 3 percent increase in revenue from a year earlier. It was only the second time in the last five quarters that revenue rose, the FDIC said.
And bank losses on loans declined in the January-March period to $21.8 billion the lowest level in four years.
Gruenberg said the overall financial health of the banking industry continues to show gradual improvement.
These are positive tailwinds for the sector as a whole.
Not all is rosy however and members of Congress have taken aim once again at the financial institutions. At one time, the question was were they too big to fail, but now the question is; are they too big to manage?
Brian Moynihan, CEO of Bank of America tackled these issues in a forbes.com article last week; "We can't be competitive if we can't provide all those services to our consumers," he says.
"Moynihan argued that the dialogue on banking has gone from concerns about "too big to fail to too big to manage." He noted that regulations brought forth by Dodd-Frank have addressed the former and added that BofA has dramatically narrowed down the scope of its business to address the later."
With the drumbeat growing for some of the larger banks to be split up, it remains to be seen if this actually comes to pass.
My personal opinion is that since they are too big to fail, they are also NOT too big to manage and nothing will come of this. That's just my opinion of course but aside from the saber rattling there simply does not seem to be a visible attempt to break up the banks to any degree.
Bank of America, at the current prices, has offered the long term investor another opportunity to buy low. In my opinion, VERY low.
Capital appreciation will take time and the continuing recovery of the economy. I believe it will happen and I also believe that this stock can double, at least, in the next 12-24 months.
Disclosure: I am long BAC.