Bank Of America: Just stay on the train – Bank of America Corporation (NYSE: BAC) –

Bank Of America: Just stay on the train – Bank of America Corporation (NYSE: BAC)


The shares of Bank of America (BAC) have outperformed the broader market since Mr. Donald J. Trump was elected president, as BAC shares have increased in value by 70%, while S & P 500 has only increased by 25%. 19659002] (Source: Nasdaq)

BAC shareholders have climbed the Trump train to impressive profits since November 2016 but, in my opinion, this bank still has a great story to tell as we move towards 2018. As such, , I think that investors should stay on the train, because the long-term history of BAC is still intact and is actually improving over time.

Where do we come from? A challenging environment

Prior to 2016, BAC was seen as the government's piggy bank, since the bank paid more than $ 90,000 in legal fines and agreements related to pre-financial crisis infractions. As a direct result, the bank's profits fell off a cliff and investors abandoned the ship for greener pastures.

Net income data (annual) of BAC by YCharts

The bank, however, not only had to face increasing legal expenses but also had to deal with the headwinds caused by the environment of low interest rate.

10-Year Treasury Rate Data by YCharts

This bank may not do well in the eyes of most investors and, simply, bearish sentiment ruined the sentiment of BAC and its shareholders . However, it is important to note that BAC was not the only bank that was punished during this period of time, since the other three large financial institutions, JPMorgan (JPM), Wells Fargo (WFC) and Citigroup (C), also faced each other selling pressure downwards.

On the other hand, a few years ago, as described in this article, Brian Moynihan, CEO, started doing what was necessary to straighten the boat and the market finally realized that the administration's plans were bearing fruit Therefore, the feeling for the bank that was once "too hot to maintain" slowly began to turn positive.

The latest results of the Bank tell a good story

On October 13, 2017, BAC reported an EPS better adjusted than the expected Q3 2017 of $ 21.8B, which compares favorably with what the bank reported in the same report quarter of the previous year.

(Source: Presentation of Q3 results 2017)

The highlights of the BAC 2017 QAC results were The following:

  • Net an income of $ 5.6B, which was an interannual increase of 13% (net profit for the year increased 19% year-on-year).
  • Interest-free expenses were $ 13.1B, which represents an improvement of 3% compared to Q3 2016.
  • Average deposits increased 4% (or $ 45B) and average loans / leases increased 6% year-on-year.
  • Return on badets ("ROA") of 0.98%.

In addition, each of the bank's business segments performed well during the most recent three-month period.

The BAC quarterly results were already well covered in Seeking Alpha (see here), so I do not want to waste time repeating what you all already know. Instead, I want to focus on two very important conclusions from the Q3 2017 results.

First, the ROA below the BAC average has affected this bank for years and was actually one of the main topics of conversation for the bears.

Asset Return Data from BAC (NYSE: TTM) by YCharts

As shown, the BAC ROA -metric that most badysts believe should be around 1 or more- has remained lagged in the last five years. The benefits of the administration to improve BAC's ROA are two: (1) obviously the bank is earning more in its badets and (2) it improves investor sentiment in an important way. This is the reason why the BAC close to 1% of ROA for the most recent quarter is so important. Looking ahead, investors should live up to expectations that this metric will continue to increase because, in my opinion, Mr. Monyihan and his team have well positioned BACs to thrive in the changing operating environment.

The other major conclusion of the quarterly results was how sensitive BAC is to interest rates (a topic that is well known to most BAC shareholders). Up to this point, BAC reported an increase of $ 1B YoY, or ~ 10%, in net interest income ("NII") for the quarter.

It may not seem like much, but it does. Most importantly, the administration expects BAC to benefit greatly from the gradual increases in interest rates as we approach 2018 and beyond. Currently, management expects the bank to benefit by $ 3.2B in additional NII in "+ 100bps of parallel change in the yield curve of the interest rate, driven mainly by sensitivity to short-term interest rates. term ".

The results of the B3 of Q3 2017 showed that Moynihan has this bank well positioned for the future, and investors should be encouraged by the prospects that US banks will soon operate in a more favorable environment.

Where are we going? An improved environment

On November 28, 2017, BAC shares ended the trading day almost 3% as the market digested Mr. Jerome Powell's confirmation hearing to become the next Fed Presidency. It was not only the BAC shares that benefited from the audience, since the financial sector finished almost 3% on the same day.

However, Powell's hearing was not the only positive news, as it is more likely that the Republican Party may have the votes to push a tax reform bill that will change the rules of the game. In addition, the 10-year treasury has also been increasing in the last six months.

10-Year Treasury Rate Data by YCharts

At the end of the day, BAC's operating environment has begun to slowly improve over the last two years and, more recently, the prospects for future growth of the bank seem extremely promising from here. What used to hold BAC shares (ie, sentiment), is what has really driven the stock price so far in 2017. And investors should not expect this to change soon.


BAC shares are quoted at an attractive valuation compared to the bank's peer group.

BAC price to Value Book data by YCharts

It is important to note that the book value of BAC and T / BV were negatively affected by the conversion of Berkshire securities (BRK.A ) (BRK.B) that occurred during the last quarter. If the BAC shares traded online with JP Morgan (JPM) or Wells Fargo (WFC), the stock would have a value of $ 34 / share (upside potential of ~ 20%). Mr. Moynihan still has something to do before BAC is seen in the same way as some of the bank's competitors, but, in my opinion, the bank is undoubtedly in the right direction and is likely to guarantee a similar type. of valuation in the near future.


BAC shares are still attractively valued at today's price, even after the increase since November 2016. I believe that this bank has much more than just the potential benefits of higher interest rates. interest, since deregulation and the opportunity to return capital to shareholders have become more important components of my investment thesis. The long-term history of BAC – an unappreciated bank that is slowly regaining investor confidence by improving its expense base and returning capital to shareholders – remains intact and, in my opinion, the future looks even brighter for this great financial institution since Focus 2018.

At the end of the day, I think the BAC shares are a big investment at the current price, so I would consider any setback as a long-term buying opportunity.

Full statement: All images were taken from BAC Q3 2017 Earnings Presentation unless otherwise indicated.

Author's note: BAC (common shares and TARP warrants) is a core holding in my RIP Portfolio and I have no plans to reduce my share in the coming weeks .

If you found this article informative and would like more information about this company or about any other company that I consider badyzing, consider clicking the "Follow" button above. Or, consider joining the premium service Going Long With WG for exclusive content and face-to-face interaction with William J. Block, CPA, president and chief investment officer of WG Investment Research LLC.

Disclaimer: This article is not a recommendation to buy or sell any listed stock. These are just my personal opinions. Each investor must do their own due diligence before making any investment decision.

Disclosure: I am / we are long BAC, C.

I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (which is not from Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.

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