BAC May Be a Deep Value Play
As the S&P 500 has fallen 6 percent year to date, our Bank of America stock has collapsed, falling by 23 percent.
While many investors have been concerned about the exposure big banks, including Bank of America, have to the falling energy market, the bank has set aside some money to cover its potential losses and has a low exposure to energy of just around 2.4 percent of all of its loan totals. The bank's stock appears to be modestly undervalued, providing a potential opportunity for deep value investors.
Lower 2015 Legal Costs and Increasing Profits for BAC
Bank of America (NYSE:BAC) has spent over $80 billion on legal expenses, fines and penalties since 2008, but finally in 2015, the bank paid the least amount in legal fees than it had in almost a decade. For the second quarter in a row, BAC saw its legal fees fall. They were at $175 million, significantly lower than the $4 billion the bank had to pay a year earlier. The falling legal expenses corresponded with BAC also experiencing an increase in its net interest income of 4.7 percent, which was the first time it had risen in five quarters.
Bank of America May Become an Event-Driven Stock
Bank of America's stock is currently selling at 60 percent of its book value. Because of its previously poor efficiency, we believe that any positive news could lead to the stock price rising in reaction, making it an event-driven stock.
Innovation and Cardless ATMs in the Near Future
Bank of America also announced it is working to upgrade its ATMs to use mobile wallets, including Apple Pay. This would allow people to be able to make withdrawals and conduct their banking at ATMs using their cell phones without needing to use their cards. In addition to providing benefits to its customers who may need to withdraw money when they've misplaced their cards or forgotten them, going to a cardless system also could prevent fraud through card skimmers, saving the bank from losses it currently suffers from such activities.
Recommendation: Consider Accumulating A Modest Amount of BAC
Bank of America's falling legal costs demonstrate that the bank may be finally getting past many of the problems left over from the recession and brain dead management.
With its modest exposure to energy markets, its increase in profits and net interest income, its valuation at only 60 percent of its book value and the potential for it to turn into an event-driven stock, Bank of America may be a deep value play at this time.
We recommend investors buy a modest amount of BAC stock.
Disclosure: I/we 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.