3 Caution Flags To Consider Before Buying Bank Of America

Sep.26.12 | About: Bank of (BAC)

Bank of America (NYSE:BAC) provides banking and financial services in the United States and internationally. Bank of America's headquarters are located in Charlotte, N.C. The bank has a market cap of $98 billion and a stock price of around $9.

Bank of America is a company that is making progress. After years of only occasional profitable quarters, the bank has been profitable in each of the last four quarters. The bank's earnings, which had been buried by bad mortgage loans, has made progress toward digging itself out of its bad debt dilemma. The bank's bad loan write-off, which was $3.25 billion in the second quarter of 2011, was down to $1.77 billion in the second quarter of 2012.

In addition to clearing up its bad debt problem, the company is acting aggressively to cut costs and shed nonessential businesses. In 2011, the company's CEO Brian Moynihan announced the bank's newest restructuring project called "Project New BAC." The goal of the project was "to eliminate $5 billion in annual expenses and 30,000 jobs by the end of 2013." It now seems as if bank executives are speeding toward that goal. On Sept. 19, it was announced that Bank of America would cut 16,000 jobs by the end of the year. OTCQB:MOST of the job cuts will probably come in the bank's consumer operation division, where the bank intends to close about 200 branches. These job cuts will put the bank ahead of schedule in its goal to eliminate jobs. The job cuts will reduce Bank of America's workforce level to below those of its closest competitors: JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C).

Bank of America has been forced to downsize because of shrinking revenues that are the result of a stagnant economy and new government regulations. Revenues for the bank have decreased in each of the last four quarters. A part of the bank's Project New BAC is to sell nonessential assets. Earlier this year it was announced that the bank was trying to sell its overseas wealth management business. It was rumored that the sale could net the bank as much as $3 billion for the business, which manages $90 billion for clients but is not producing profits for the bank. There has been no new news about whether or not the bank is making progress toward a sell.

The bank has been making progress in other areas of its downsizing strategy, as it has already sold a number of nonessential businesses. Since the announcement of the Project New BAC initiative, the bank has sold private bank First Republic, asset management giant BlackRock, and Balboa Insurance. The bank has also sold several overseas financial holdings, including part of its stake in the China Construction Bank. It seems as if investors like Bank of America's cost-cutting strategy because its stock price has increased by 40% over the last 52 weeks.

Recent Bank of America News

  • On Sept. 25, Bank of America suffered a loss of around $10 million with a "dividend trade" in which traders sell call options the day before an ETF goes ex-dividend with the intention of buying them back cheaper. The play is a favorite of big operators, but -- as Friday's experience shows -- is definitely not risk-free.
  • On Sept. 25 it was announced that "recent online service interruptions at Bank of America and JPMorgan Chase are believed to have been caused by Iranian hackers who have targeted big U.S. banks repeatedly during the past year. It's not known if Iran's cyber attacks can cause significant damage."
  • On Sept. 25, celebrity stock market analyst Jim Cramer rated Bank of America as a buy. This was quite a turnaround because Cramer had rated the stock as a sell as late as Sept. 10.
  • On Sept. 25, it was reported that the "S&P/Case-Shiller 20-city composite posted a 1.6% increase in July home prices." This is the third straight month that the index, which measures 20 cities, showed an increase in housing prices. An improved housing market will help Bank of America, but it is unclear how much.
  • On Sept. 14, federal and state authorities announced that they were investigating Bank of America along with several other major banks for "failing to monitor cash transactions in and out of their branches, a lapse that may have enabled drug dealers and terrorists to launder tainted money." Officials say that the investigation is intended to send a signal to the major banks that weak compliance is unacceptable.
  • On July 28, it was revealed that Bank of America had reduced the number of its ATMs. According to SNL Financial, the bank reduced its ATM network by 9% or by more than 1,500 ATMs. The reduction was mainly in machines located in shopping malls and gas stations. The reduction is part of the bank's cost-cutting plan.

Conclusion

Bank of America is making aggressive moves to cut costs, and investors like what the bank has been doing. The bank's stock price is up by 26% over the last two months. While the bank has been profitable in each of the last four quarters, this is a stock that investors should be cautious of. I would be cautious about this stock for three reasons. The first is because the bank's earnings are tied to an economy that is moving forward, but at a snail's pace. The second reason to use caution is because the banks revenues have declined in each of the last four quarters. The third reason to use caution is because, despite the bank's reasonable valuations, its stock price has rallied so fast that it may be primed for a pullback.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.