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.

Citigroup Inc. (C), Bank of America Corp (BAC): Who’s The Lowest-Priced Big Bank?

Since the beginning of 2012, shares of Bank of America Corp (NYSE:BAC) have soared by more than 145%, leaving both the KBW Bank Index and the S&P 500 in the dust.

BAC Total Return Price Chart

Given this, you’d be excused for concluding that its shares must be outrageously priced. But this conclusion couldn’t be further from the truth, at least not on a relative basis, as Bank of America Corp (NYSE:BAC) remains the cheapest big bank stock in the market today.

Bank of America Corp (NYSE:BAC)

According to data supplied by Standard & Poor’s Capital IQ, the nation’s second largest bank by assets trades for only 0.72 times its book value. Meanwhile, the average valuation of the 24 banks included in the KBW Bank Index is 1.25 times book, or 73% higher.

While it’s true the price-to-book value ratio is somewhat outdated given the new regulations surrounding capital requirements, Bank of America Corp (NYSE:BAC)’s comparatively cheap valuation holds true even when one considers the stricter price-to-tangible book value.

Source: Standard & Poor’s Capital IQ.

By this measure, Bank of America Corp (NYSE:BAC) trades for 1.11 times tangible book, behind only Citigroup Inc. (NYSE:C), which trades for an analogous multiple of 0.94. The index’s average is 1.82.

The commonality here should be apparent, as Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C) struggled more than their peers during and after the financial crisis. But, as Benjamin Graham, the father of value investing, would note, there’s a price at which everything is a bargain.

The question, in turn, is whether, despite the recent surge in its shares, Bank of America could still be characterized as such.

I think the answer is “yes,” though obviously much less so than before.

The catalysts for its shares are twofold. First, despite shelling out tens of billions of dollars for legal settlements and expenses, it’s still not out of the woods. The biggest remaining cases are a handful of securities actions that are being litigated in California, and a case that’s before a judge in New York over whether an $8.5 billion settlement the bank had previously entered into should be approved.

And second, Bank of America Corp (NYSE:BAC) still needs to complete a number of expense initiatives that are designed to save it more than $8 billion a year.

Once these are clear, industry analysts expect the bank to earn anywhere between $20 billion and $35 billion a year in pre-tax earnings. Assuming an average tax rate of 35%, which is likely on the high side, that equates to between $1.30 and $2.30 in earnings per share. And taking this one step further, at 10 times earnings, that produces a share price of between $13 and $23.

The point is, there’s plenty of room for Bank of America to trade at the industry’s average multiple to both book and tangible book value and still be well within a reasonable multiple for its earnings.

The article Bank of America Is Still the Cheapest Big Bank originally appeared on and is written by John Maxfield.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.