3 Reasons Why You May Want to Rethink Bank of America
The financial landscape of higher interest rates is not exactly coming to fruition. Instead of steadily increasing rates that were suppose to grow profit margins at big banks, Treasury yields remain depressed and continue to make new lows. This development, along with other issues, should make investors wary. Let’s take a look at three reasons why investors should think twice about buying Bank of America (NYSE:BAC).
The nation’s second largest bank by assets recently reported a dismal quarter. Bank of America’s fourth-quarter profit dropped 11% to $3.05 billion, compared to $3.44 billion a year earlier. Meanwhile, revenue sank 13% to $18.96 billion during the same period. Both figures came in below Wall Street’s estimates.
On the positive, Bank of America’s legal expenses fell to $393 million in the fourth quarter. Litigation expenses totaled $2.3 billion a year earlier. However, investors should not lose sight of the glaring revenue declines across departments. Expenses can only be cut to a certain point. Trading revenue for fixed income, currencies, and commodities plunged for the quarter, and volatility does not appear to be diminishing in 2015. The 30-year U.S. Treasury yield fell to a fresh all-time low in January.
Bank of America did not provide guidance in its earnings release, which is understandable given the results for last year. In 2014, total net income plummeted 58% from 2013.
Despite the infamous bailouts, the banking sector is still trying to fully recover from the financial crisis. New regulations have dampened trading operations, while investors and consumers still don’t fully trust large institutions. Making matters worse, between ongoing legal expenses, loan loss reserves, and accounting gimmicks, banks are difficult — if not impossible — to understand or value.
Bank of America is hardly the only bank facing issues. Citigroup (NYSE:C) recently reported disappointing results. Net income crashed to $350 million in the fourth quarter, compared to $2.5 billion a year earlier. Quarterly profits also declined at J.P. Morgan (NYSE:JPM), the nation’s largest bank by assets, which included CEO Jamie Dimon offering some colorful commentary.
“We have five or six regulators or people coming after us on every different issue,” explained Dimon after the earnings release. “In the old days, you dealt with one regulator when you had an issue, maybe two. Now it’s five or six. It makes it very difficult and very complicated. You all should ask the question about how American that is. And how fair that is. And how complex that is for companies.”
Stock charts can be a very controversial issue among investors. Some view it as junk science while others believe it can be helpful when making investment decisions. Either way, technicals have the ability to reflect investor sentiment and trader psychology. When taken into consideration along with fundamentals, charts can offer a more complete picture of a company.
As the chart above shows, Bank of America shares have been struggling to hold above $17 over the past year. Shares touched $18.21 on the last trading day of 2014, representing its highest level since 2010, but have since been crushed in 2015. The latest earnings release sent shares even further below the 200-day MA. Considering that past resistance typically becomes strong support, Bank of America may not find strong support until the $12 to $13.50 range, signaling that there are probably better places for investors to place their money.
Follow Eric on Twitter @Mr_Eric_WSCS
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