Bank of America’s (NYSE:BAC) stock price has performed extremely well over the last two years, nearly doubling in 2012, and is off to a strong start this year. However, with new allegations of mortgage settlement violations and the imminent unwinding of the Fed’s stimulus program, is Bank of America worth the risk? Let’s use relevant sections of our CHEAT SHEET framework to see whether Bank of America is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
C = Catalysts for the Stock’s Movement
Home loans are an important part of Bank of America’s operations and revenue stream. Following the 2008 financial crisis, the bank drastically reduced the amount of new mortgage loans. Recently, the housing market has regained some strength, and Bank of America has picked up its new mortgage loan issuances to meet demand. In the first quarter, mortgage originations experienced a quarter-over-quarter increase of 57 percent. With home sales showing positive growth over the last several quarters, Bank of America can expect continued profits in this division.
Recent allegations of violating the National Mortgage Settlement put into place last year could prove detrimental to the bank. The division was tainted with indictments of misconduct during the 2008 financial crisis. Just when confidence has begun to return to the bank’s mortgage origination operations, new allegations have surfaced. The newest and also most severe of these comes from New York attorney general Eric Schneiderman who alleges that Bank of America may have violated last year’s National Mortgage Settlement.
Surprisingly enough, low interest rates in the U.S. have actually benefitted Bank of America’s investment banking division as investors search for higher yields. The bank’s trading desks have benefitted from increased trading volume from a surging U.S. equities market and high demand for international debt issuances. B of A’s capital markets division netted a profit of around $5.5 billion in the first quarter—its best quarterly revenue figure since 2011.
E = Exceptional Performance Relative to Peers?
Because of the difficulty in valuing bank stocks, it is a useful exercise to compare Bank of America to its chief competitors: Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and JP Morgan Chase (NYSE:JPM). Bank of America is trading at a higher price-to-earnings multiple than all of its competitors besides Wells Fargo. This premium, however, does not seem justified. According to analyst estimates, Bank of America has the lowest projected earnings per share of the four banks. This estimate could improve depending on how “New BAC”—a several billion dollar cost-cutting initiative—goes this year. While Bank of America has taken great strides to right itself after the financial crisis, both Citigroup and JP Morgan are much more attractive on paper, and unlike B of A, they are free from current legal woes.
|EPS estimate (2013)||$0.94||$4.72||$3.71||5.71|
T = Technicals are Mixed
Bank of America is currently trading at around $12.90, above its 200-day moving average of $12.08, but below its 50-day moving average of $13.17. The share price has been experiencing an uptrend since the beginning of last summer, but the stock has been volatile lately after recent market uncertainty and a mixed first quarter earnings report.
Bank of America’s stock price has been on a remarkable rebound for the last two years. Bank stocks in general have been volatile over the last several weeks. This volatility is partially due to the uncertainty surrounding when Federal stimulus will end.
The banking industry has enjoyed attractive gains this year, and there are certainly more attractive stocks in the sector than Bank of America. The stock is currently trading at a premium relative to its major competitors, while its earnings forecasts are lower. Its mortgage origination business is regaining some traction and its investment banking business performed well in the first quarter. The bank is facing litigation that could seriously harm its short-term profits, and also calls into question whether B of A has tied up all of its loose ends from the financial crisis. If you believe that the banking industry is poised for a breakout year in 2013, you might consider adding the stock to your portfolio, but for now Bank of America is a WAIT AND SEE.
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