The principal reason a bank would trade for less than its tangible equity, in turn, is because at least some analysts and investors believe that it’s either overstated the value of certain assets on its balance sheet, or because it has unknown or undisclosed losses coming down the pike.
In Bank of America’s case, it’s a bit of both. As I discussed here, the nation’s second largest lender is sitting on $136.7 billion in mortgages that are either already bad or could easily turn bad, and thus drive down the company’s tangible book value. And as I discussed here, Bank of America could still be forced to pay tens of billions of dollars in legal claims for actions committed by Countrywide Financial, the mortgage originator the bank purchased in 2008.
Why I’m nevertheless bullish on B of A
The fact that a bank is trading at a discount to tangible book value isn’t necessarily bad. Indeed, if anything, it presents an opportunity to buy into a stock on the cheap — assuming, that is, you’re confident the underlying operation will ultimately turn around.
And this is the reason I’m bullish on Bank of America. Does it have problems? Yes. I don’t think anyone can deny that. But I’m confident it’ll solve those. And when it does, both its share price and dividend payout will shoot up, rewarding investors who have the fortitude to wait.
The article Why Is Bank of America So Cheap? originally appeared on Fool.com and is written by John Maxfield.
John Maxfield owns shares of Bank of America. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo.
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