Bankof America Corporation (BoA) is a multinational banking and financial servicescorporations. It is one of the Big Four banks and ranked the 2nd onthe list of largest banks by assets in the United States with headquarters inCharlotte, North Carolina. As of December 2016 the company held 10.73% of allbank deposits in the USA. The acquisition of Merrill Lynch in 2008 made it theworld’s largest wealth management corporation and a major player in theinvestment banking market.
Itscustomers range from governments to the world’s largest corporations, frominstitutional investors to small/medium sized businesses and individualconsumers. The business activities of the bank divided into six major segments:Global Banking and Markets, Global Commercial Banking, Global Wealth andInvestment Management, Deposits, Consumer Real Estate Services, Card Services.Another seventh collective category is named “All other”. The largest share ofthe bank’s revenue stream is Global Banking and Markets followed by its CardServices segment.
As of December2017, 32 polled investment analysts advises investors to hold their positionsin Bank of America as the company will outperform the market. If we look at thefuture earning basis, BoA is valued eight times its fiscal 2018 forecasts. Forthe long-term shareholder the data speaks for itself: the BoA is the best forinvesting in stock on forward earning basis. The BoA price-to-book ratio is upto 0.68 from mid-July low of 0.55.
Shares are up 35% compared to its rivals whogained just 6% to 28% over the same span, while Wells Fargo wasnegative. Sector outlook Theglobal economic growth is providing a positive trend for corporate earnings. Ifwe exclude post-crisis bounce, the research shows that for the first time since2005 all major sectors declared earnings-per-share growth higher than 10%. Theinflations is expected to grow slightly in the U.S. but in EU it will move atlow level sideways. Analytical forecasts indicates steady hold in Europe, U.S.
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,Japan, China and earnings expectations have almost doubled this year. It isdifficult to spot a systematic risk in advance; however, in current environmentof low volatility and solid corporate earnings, this trend provide us fertileground for taking risk in stocks. Generally speaking, banks areconsidered cheap when their shares trade for a discount to book value.Alternatively, banks tend to be considered expensive if they trade for two ormore times book value.
In Bank of America’s case, its shares are currentlypriced at $24.96 per share, as of Monday’s closing price. Its book value pershare is $24.88.
Thus, its price-to-book-value ratio comes out to just above1.0. This suggests that Bank of America’s stock is neither cheap nor expensive,but rather right between the two.
Major competitors of Bank ofAmerica posted following yields from 1.9% to maximum 3.1%. However, BoA isplanning a return of $17 billion to its shareholders in the form of dividendsand repurchases, forming ~7.
2% of the total market cap. The bank’s currentpay-out of $0.075 per share which is a 60% hike in dividends. Low dividends andyields in the banking sector is due to a stress test performance and a slowerpick up growth in the last few years. BoA is catching up operating performanceand risk management amid increasing the pay outs. Fundamental Analysis Bank of America provides investorswith a good entry point for buying stock at a good price. What is good to knowis that the BoA is the major bank with the size and scale to compete with JPMorgan Chase & Co and it is very uncertain that the bank is not going todisappear overnight. Moreover, broad spectrum of services and the extensivereach enables BoA to be financially successful.
The cash flows and earningsshow positive dynamics. The bigger the bank’s asset size is, the higher theregulatory examination which results lower risk of financial distress in thefuture. As overall economic conditions in the United States improve, the unemploymentrate decreases and house prices increase the bank is most likely to face lowerrates of default going forward which in turn leads to better profitability.
Revenue AnalysisThe company’sgrowth was influenced by improvement in net interest income margins and improvementin loan loss provisions. As a result, net interest income increased improvedfrom 44.87% to 47.40% compared to the same period last year. As of November2017 shares of BoA have risen nearly 16 percent this year, slightlyoutperforming the S index.
As of December 2017, BoA has following incomestatement key financial ratios: price earnings ratio is 16.54, price salesration 2.99, operating margin 43.1, net profit margin 20.3, and dividend yield1.
24%. Over the next years, analysts following Bank of America expecting it togrow at an average annual rate of 8%. Assuming that in the coming years theFederal Reserve increases interest rates, BoA will benefit from incrementalincreases in net interest margins combined with strong presence in the consumerbanking. Despite a slowdown in fixed-income trading businessBoA’s third-quarter result was higher than expected by Wall Streetexpectations. Thomson Reuters forecasted earnings per share 45 cents; however,it resulted 0.03 cents higher. Revenue prognosis reached $22.079billion versus$21.
976 billion. The stock of the company closed 1.5 percent higher. Loans havegone up 6 percent, not as high as rival bank JP Morgan, but margins improvingyear over year, which is a very good sign. Of course, there are some weak spotssuch as trading revenues.Third quarter fixedincome revenue fell 22 percent compared to last year period from $2.
646 billionto $2.152 billion this year. According to BoA this slowdown was explained by alower volatility in rates products. $11.4 billion netinterest income, a key metric for any bank, was more than the $11.33 billionexpected. Deposits came up to $1.284 trillion as opposed expectation to $1.
273trillion. Loans totalling up to $927.1 billion were more than the prognosis of $919.94billion. BoA’s focus on growth and customer service produced strong resultssuch as 4% business growth in four lines of business.
Consumer banking businessincome increased by 10 percent of $8.8 billion. Loans totalled to 8 percentgrowth and so does the deposit 9 by percent. Revenue rose 6% to $4.6 billion.
Overallpicture tells us that in 2017 Bank of America performance was stable and strong.Stock price forecast.The price forecast for BoA have a median target of 29.00 with maximum estimateof 32.
00 and a minimum estimate of 20.00. The median estimate is +3.20 from thelast price of 28.10.
We can see already that the low-volatility regime in the marketwas triggered and it is now in the steady growth. Geopolitical risks are lurk.
