Bank Of America Has A Story To Tell

Dec. 03, 2018 5:07 AM ETBank of America Corporation (BAC)60 Comments
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WG Investment Research


  • Bank of America's stock has underperformed the broader market so far in 2018, but the bank's long-term story remains intact.
  • There are several reasons to remain bullish, but, in my opinion, Bank of America's improving cost structure is the main reason to stay long the stock.
  • I am long Bank of America with an overweight position, and I plan to stay long.
  • This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Get started today »

Bank of America's (NYSE:BAC) stock has significantly underperformed the broader market so far in 2018.

ChartBAC data by YCharts

It has been a tough environment for the banks in 2018 and this may continue to be the case over the next few quarters, but, in my opinion, there are several legitimate reasons to stay long Bank of America ("BofA"), with its improving cost structure being near the top of that list.

Expenses Are The Story, At Least For The Time Being

BofA has consistently improved its cost structure since the mid-2010s and, looking ahead, the bank will likely continue to focus on expense management. Some may think that improving its cost structure is not enough to materially impact the bank's bottom-line, but, in my opinion, that could not be further from the truth. Remember, BofA came out of the Financial Crisis with a bloated expense base so, as I previously described, any meaningful change would indeed have a real impact on earnings. The story is playing out exactly how I predicted.

For example, the bank's total revenue is basically flat since 2013, but non-interest expenses are down by $14.4B, or 20%, over the same period of time.

2017 2016 2015 2014 2013
Total revenue, net of interest expense $87,253 $83,701 $82,965 $85,894 $87,502
Non-interest expense $54,743 $55,083 $57,617 $75,656 $69,213
Non-interest expense as % of total revenue 63% 66% 69% 88% 79%

Source: 2017 10-K; table created by author

The results are just as good in the current year, as the bank has reduced non-interest expenses by 3% YoY over the first nine months of 2018.

Source: Q3 2017 10-Q

Directly related to improving its cost structure, BofA has significantly lowered its efficiency ratio over the last few quarters.

Q3 2018 Q2 2018 Q1 2018 Q4
ChartBAC Revenue (Quarterly) data by YCharts

ChartBAC PE Ratio (TTM) data by YCharts

This article was written by

WG Investment Research profile picture
Our President and CIO is a CPA with experience in public accounting and the financial services industry. He earned his Master of Accountancy degree in 2008 and his B.S. in Business Management in 2007. He is also a Level III CFA candidate. He has been intrigued by the market from the start. Over the years, he has learned that long-term investing is a discipline that, if followed, will help contribute to building lasting wealth. As such, most of our articles will be about the investments that we plan to hold for at least 3 to 5 years, as long as the company's story does not change. As a Seeking Alpha contributor, our main goal is to write about the companies that are key to our portfolio with the hope of promoting discussion (for or against the investment) from others within the SA community.Please visit our website for more information about W.G. Investment Research LLC.

Disclosure: I am/we are 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.

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