Bank of America Corp (BAC) Trading at 2013 Levels, What Changed?

Since 2013 Bank of America Corp (NYSE:BAC) has made progress. However, the stock has returned to the trading levels of 2013. Comparing the position of the company statistically shows some of the progress they have made. For instance, the company bought back about 350 million shares in the last two years. Also, the bank has cleaned up their risk profile. As a result, some investors, as well as, analysts believe that the stock is undervalued with the recent dip. That could be seen from the way the stock tanked 24% in the current year. The only other bank to suffer more among the top four was Citigroup Inc (NYSE:C), which many could argue is riskier. In fact, the lower price point is only providing an opportunity for both banks, as well as, investors. The company could buy back more shares at a value much less than its book value creating more value for long term holders.

Core Earnings Stagnated

Bank of America Corp (NYSE:BAC) was no exception to the victim of the long spell of the low-interest rate regime. That was one of the reasons its core earnings power remained at the stagnated levels between the years 2013 and 2015. Of course, the bank also had to face some legacy issues, as well as, cut down its risk profile. However, the main culprit for core earnings stagnation was the compression of net interest margin (NIM) to 2.2% in 2015 from 2.37% in 2013. Its net interest income, on a GAAP basis, excluding the $600 million trups redemption charge, dipped to $39.9 billion in 2015 from $42.65 billion in the year 2013.

LCR or Liquidity Coverage Ratio was a key factor in Bank of America Corp (NYSE:BAC)’s NIM compression last year. That was because the management was keen on reducing Asset Liability Management activities to manage the LCR requirement that is due 2017. However, the bank did well to offset the weakness by reducing its cost constantly in core operating expenses, i.e. excluding LAS and litigation, to $52.4 billion in 2015 from $54.2 billion in 2013. The bank continued to believe that managing costs would be crucial while continuing to invest in their business even while market conditions are difficult. One of the factors that the bank felt proud was the quality of its assets, which remained strong.

Balance Sheet Comparisons

Some of the balance sheet numbers are noteworthy to see how Bank of America Corp (NYSE:BAC) has progressed despite the stock price stagnation. For instance, its tangible common equity increased to $162 billion at the end of the year 2015 from $146 billion in 2013. Tangible equity ratio improved to 7.8% from 7.5% in the year 2014 and 7.2% in 2013. Another key factor was that non-performing loans along with foreclosed were reduced to $9.8 billion from $17.8 billion at the end of the year 2013. That meant $8 billion worth of NPL and foreclosure and accounted for nearly 45% reduction in the same period.

The depositors confidence in Bank of America Corp (NYSE:BAC) can be seen as the average deposit grew to $1.16 trillion last year from $1.09 trillion in the year 2013. The company’s average loans and leases skid 4% to $882 billion in 2015 from $919 billion in the year 2013. This was partially affected by the runoff of certain portfolios. Average core loans and leases excluding LAS and all other grew to $705 billion in 2015 from $646 billion in the year 2013. There is one more key factor, which was its average long-term debt, which fell to $240.1 billion from $263.4 billion during the same period under review.

Reduced Outstanding Shares

There are also few other key factors that are interesting to see in respect of Bank of America Corp (NYSE:BAC). For instance, its 60+day delinquent in service portfolio reduced to 103,000 units at the end of the fourth quarter last year from 300,000 units in the fourth quarter of the year 2013. Another key factor was that its liquidity jumped 34% to $504 billion at the end of the fourth quarter from $376 billion at the end of the same quarter in 2013. Aside from these factors, its outstanding shares fell to 11.15 billion last year from 11.5 billion at the end of the fourth quarter in 2013.

Despite these favorable factors, Bank of America Corp (NYSE:BAC) stock remained stagnant and did not even react favorably. However, investors seemed to have been worried more about the possible exposure towards energy-related loans. Until now, it looks to be at the manageable level only. The company’s management indicated during the conference call that even if the oil price remained at $30 a barrel for the next three quarters, its losses would be approximately $700 million. John McDonald, an analyst at Bernstein bank, said that in a stressed condition, the bank could have net losses that were more than the energy reserves of approximately $1.2 billion. The analyst believes that the net losses would account for only 0.5% of its tangible common equity. Alternatively, its tangible common equity was about 5% of consensus net income and that the additional losses meant 0.5% of its tangible common equity only.


Some of the metrics in respect of Bank of America Corp (NYSE:BAC) also favors the stock that it has the potential for further upside. For instance, its price to book value was only 0.54 (.79 tangible) compared to Wells Fargo & Co (NYSE:WFC)’s 1.38 and JPMorgan Chase & Group Inc. (NYSE:JPM)’s 1.17. Similarly, its price to earnings was 9.7, which was lower than S&P 500’s 18.1.


Between the years 2013 and 2015, core earnings might have been roughly stagnant for Bank of America Corp (NYSE:BAC). However, there were other factors like less risky balance sheet with litigation risk, as well as, mortgage put backs risk at reduced level, higher capital, and higher liquidity. Yet, the stock price remained at the same level. While core loans witnessed growth, runoffs have pulled back in overall average loans. That should change. Its tangible common equity witnessed steady growth while the bank was on a more solid footing. Even if the economy faces rough weather, the bank is better positioned to manage it than ever before. Higher capital requirements naturally included minimal risks, and that could keep the dividend hike and share repurchases more moderated than the shareholders would have liked it to be.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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