Bank Of America: The Low Interest Rate Conundrum

| About: Bank of (BAC)

I can recall, not that long ago actually, that investors cheered when interest rates were cut. When the Fed moved to lower the rates, the stock markets rallied. The thinking was that "cheap" money was good for business, good for investors, and good for the nation. It sure felt good when we were able to take an existing mortgage on our home, and refinance from 7.75% down to 6.05%.

The truth is, it was good for everyone. Businesses were able to borrow more for less, and regular folks who refinanced, or paid off credit cards with lower rate cards, had more money in their pockets. They spent more money, goods and services increased in costs, but always sold, inflation was always an issue but not many folks cared, and all was right with the world.

Then the music stopped.

There really is no sense in rehashing what we already know, but it might be time to look at "things" differently.

The Low Interest Rate Conundrum

We now live in a world where money is so cheap it is really not worth that much. Banks are not lending mortgage money because with rates at all time lows, they refuse to take the risk for such a low reward. As much as our Government has tried to shove new mortgages down homeowners' throats. More often than not, they cannot even qualify.

What used to be an "acceptable" loan is now looked at as the "evil" loan that got us into this mess in the first place. An institution like Bank of America (NYSE:BAC) has been in an ongoing process of cleaning up its balance sheet, and becoming healthier without lending. It almost seems surreal.

Take a look at this chart. Interest rates were at about 6.5% 5 years ago, but banks were lending money for mortgages at nearly double the amount that they are today. It seems almost unbelievable, and smarter folks than me would put up figures about all sorts of variables to explain this, and they probably would be right.

That does not change the FACT that more money was borrowed when interest rates were higher, period.

This scenario is not exclusive to Bank of America, but since they own Countrywide, and have been cleaning up the mess of truly irresponsible loans, it becomes one of the precise reasons that Bank of America stock is such a great bargain.

Sounds ridiculous right? Well, not quite.

I love charts. I started loving them when Ross Perot used to take out a chart during a debate, and point to the real numbers. No baloney and no magic. It was probably the reason that an Independent 3rd Party candidate for President garnered nearly 25% of the vote in 1992. People understood those charts.

Take a look at the one up there. Bank of America has improved its revenues, profit margins, and earnings per share, without lending nearly as much (as you can see in the first chart).

With interest rates so low, and money so cheap, Bank of America has been able to turn its business around without taking on risks. Of course, the company has made a conscious decision to make themselves smaller. It is working, but the shares are still selling for less than half of the book value of the company.

That is an investor opportunity in my book. Of course, not everyone on Wall Street is a believer yet, but that's just fine for folks who want to buy shares now, at bargain prices. When the "horse" is let out of the "barn", it will be too late to stop that horse from galloping away. The investors will be chasing, rather than investing.

Imagine for a moment, what that chart will look like when Bank of America begins lending at a brisk pace again. Oh, it will happen, and interest rates will eventually rise. The question at that point will be whether or not folks bought shares of BAC at $7 or $8 bucks, or less, and when will they take profits?

My Opinion

I could be, and often am, completely wrong about my opinion. When it comes to Bank Of America I keep trying to find the fundamental reasons NOT to buy the stock and to just stop writing about it. I simply have not found the reasons yet.

After looking at these simple, factual charts, what can anyone come up with to change my opinion?

Disclosure: I am long BAC. 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.