Bank Of America - A Financial Giant's (Slow) Reawakening

| About: Bank of (BAC)
This article is now exclusive for PRO subscribers.

Since it's among the biggest banks in the United States, Bank of America (NYSE:BAC) continues to grab the attention of investors. It's true, though, that it's no longer the behemoth that it once was - its value shrunk due to the recession and the bailout. While some chose to stay away from the financial corporation during its lowest moments, there are those who saw the silver lining and decided to invest. Given that Bank of America's per-share price dropped to $8 during the toughest times, those who took a chance back then have almost doubled their investments by now.

So, one question usually crosses the minds of those (including you) who didn't believe in Bank of America's ability to bounce back from its very disappointing performance in the previous years: would it still be smart to invest in the financial corporation today?

A Giant's Revival

As you'd know, answering that question involves the need to see whether there have been profit improvements as of late. Well, you'd be surprised to find out that Bank of America didn't just improve, it managed to achieve a breakthrough - its total earnings for the second quarter of 2013 were 70 percent higher than those of the same period last year. How did the financial services company manage to pull that off? Truth be told, it was all due to an $8-billion cost-cutting program (which wasn't really new, but merely paid off at a most opportune time).

You're probably wondering what kind of cost-reduction effort it was. To put it simply, the program had two important parts. The first one was all about the lesser need for litigation-related spending (freeing up $1 billion in funds). The second essentially involved massive layoffs (a few thousand more and the overall "casualty" would have reached 20,000 employees). As you've realized a short while ago, the cost-cutting program isn't something that was only started last year. Since 2011, Bank of America did its best to shave off $1.5 billion from its expenses each quarter.

It's also important to mention this fact - the corporation's expense-reduction efforts allowed it to beat its rivals. Specifically, even though the banking firm merely managed to achieve a 3.5-percent growth in its top line (for 2013), the reduced spending boosted the bottom line significantly.

Troubles Do Exist

While the things that you've discovered about Bank of America are all very encouraging, you'd be wrong if you're thinking that the financial-services company isn't facing all sorts of problems. Well, for one, the entire consumer real estate industry hasn't yet recovered from its slump (as of this year's second quarter, business sank further by 16 percent). Aside from that, various kinds of investment activity (from those that stem from the bond market to the ones that involve currencies and commodities) slowed down - leading to $300 million worth of lost opportunities.

After seeing that massive number, you'd probably ask this question: how did Bank of America survive that (especially since it still had to contend with the $40-billion impact of 2008's Countrywide Financial fiasco)? The company was fortunate enough to have benefited from a lively equities market (the number of successful transactions went up by around 53 percent). Of course, the positive state of retail brokerage, banking (among traders), and investment management all helped Bank of America stay afloat.

At this point, you'd most likely understand that the financial service firm's remarkable performance as of late is being offset by not-so-encouraging numbers. Among those, the net value is obviously the most important due to its long-term effect. Due to never ending bond portfolio concerns and the seemingly endless balancing act between losses and gains, Bank of America's net worth has been continuously dropping (which is why many investors don't even think of putting money into the company no matter how cheap its stocks are).

Making a Decision

So far, it's been made clear that investing in Bank of America comes with all kinds of risks and opportunities. To be a bit more specific, those who believe in the potential of long-term investment might find the financial corporation quite tempting. After all, it probably has what it takes to keep its bottom-line momentum and eventually regain its status as an industrial behemoth. For people who are seeking the best short-term opportunities though, the company isn't a good choice. The problems that currently plague the firm take years and even decades to solve.

Overall, you'd really have to think hard about your aims to determine whether Bank of America should be part of your portfolio.

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.