Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Bank of America Corp (BAC): Banking, When Do Fundamentals Outweigh Trust?

Page 1 of 2

The financial collapse of 2007, and the recession that followed in 2008, changed the way we looked at banks forever. Throughout the chaos we learned that banks are much more complex structures than we ever could have imagined which, to some degree, makes them riskier thank we’d ever hoped.

What followed the crash was a complete annihilation of banking stocks, and the industry has been slow to recover.

But some banking stocks have been avoided much more than others. Let’s take a look at the current banking landscape and see if we can separate the wheat from the chaff.

Banking on housing?

The current banking landscape is a fascinating one. After the crash of 2008 all banks traded like the plague, but now they’ve separated themselves a bit. The odd thing is that the separation of “acceptable bank stocks,” versus “risky ones,” doesn’t seem to be based on anything that the actual businesses are doing.

I’d argue that the “blind trust” of some banks could be leading investors into a trap, while also causing them to miss some values that are right under their nose.

Bank of America Corp (NYSE:BAC) fell hard during the crash due to housing woes. Since then some banks–like Wells Fargo & Co (NYSE:WFC) and U.S. Bancorp (NYSE:USB) –with much greater exposure to housing, have rebounded faster.

Bank of America Corp (NYSE:BAC)Most investors still associate Bank of America Corp (NYSE:BAC) with the housing crisis, but Wells Fargo actually relies on housing the most of any major bank. Mortgage related fees and business account for 26% of Wells Fargo & Co (NYSE:WFC)’s business. Likewise the mortgage business bring in nearly 20% of US Bank’s loans, compared to just 7% at Bank of America.

In some ways, investors are treating the banks much like a burn victim would treat a bonfire. Even though Bank of America Corp (NYSE:BAC)’s fundamentals make it look stronger than other banks, they’re hesitant to get too close to the flame.

Mortgage origination decline: the next game changer?

The mortgage outlook over the next six months should benefit Bank of America Corp (NYSE:BAC) over Wells and US Bank, as well. Over the past two years interest rates have done nothing but decline, which has led to a refinancing boom, and this has benefited Wells Fargo & Co (NYSE:WFC) and US Bank immensely. Any increase in rates, which we’re already seeing, will lower mortgage refinancing fee revenue, which could crimp earnings at both Wells Fargo and US Bank.

The housing trends, dare I say it, actually should benefit Bank of America Corp (NYSE:BAC) over the next year or so. When you step back and look at what really hurt Bank of America during the crash, it was their disastrous acquisition of Countrywide and the foreclosures that came with it. The trend we are seeing right now in housing is that rates are creeping up but, at the same time, the number of foreclosed homes in the U.S. is expected to decrease dramatically over the next year. A decrease in foreclosures should help BAC; and at the same time, the bank is not as dependent on mortgage origination revenue as its competitors.

Further, Bank of America Corp (NYSE:BAC) has some of the highest exposure to commercial banking (28% of revenues) and credit cards (20% of revenues) among the “mega-banks.” Commercial banking and credit cards have been the absolute best place to lend in recent years, with a very low percentage of non-performing loans. When you take a look at Bank of America’s fundamentals and its loan portfolio, it should trade at a rich (or even fair) valuation.

So why doesn’t it?

The trust factor

At the end of the day it comes back to trust, or a lack thereof. A lack of trust is why Bank of America Corp (NYSE:BAC) trades at a price to book ratio well below (0.71) its peers. It’s also the reason that the bank needed Warren Buffett to invest in it, as a sign of stability.

Bank of America reported quarterly earnings this week that showed net income growth of 63%; trust is the reason the stock is still stuck below $15 per share.

Page 1 of 2
Loading Comments...