A World-Class Bank That’s 56% Undervalued – Bank of America Corporation (NYSE:BAC)

I’ve long been a fan of Bank of America (NYSE:BAC), which, under the excellent leadership of Brian Moynihan, has managed to do a complete 180-degree turn from the dark days of the financial crisis.

BAC Total Return Price data by YCharts

However, thanks to the surprise election of Donald Trump and the market’s hopes for massive tax reform, deregulation, and economic stimulus, shares have soared in recent months, far more than those of its rival banks or the market as a whole.

Let’s take a closer look at Bank of America’s latest results in the larger context of its ongoing transformation into one of the world’s safest and highest-quality banks. More importantly, learn both why shares remain incredibly undervalued and also why some troubling risks could spell trouble for its short-term share price.

Blowout Q1 Results Show That Bank Of America’s Turnaround Is Firing On All Cylinders

Metric Q1 2016 Q1 2017 YoY Change
Revenue $20.8 billion $22.2 billion 7.0%
Net Interest Income $10.5 billion $11.1 billion 5.5%
Net Income $3.0 billion $4.4 billion 44.4%
Shares Outstanding 11.1 billion 10.9 billion -1.7%
EPS $0.28 $0.41 46.4%
Dividend $0.05 $0.075 50.0%
Payout Ratio 17.9% 18.3% 2.4%

(Source: Earnings Release)

Not surprisingly, the two most recent rate hikes from the Federal Reserve have made for boom times for Bank of America. However, note that net interest income, while up modestly, doesn’t entirely explain the very impressive top and bottom line growth.

(Source: Bank of America Q1 Earnings Presentation)

As you can see, continued loan growth, especially consumer and business loans, which rose 8% and 6% respectively, has allowed the bank to nicely grow its total deposits. Which, in turn, helped to fuel some very impressive profit growth across all its divisions.

This was especially true for the bank’s global division and trading arm, which benefits from rising global markets and increased M&A activity. And while it is true that these divisions can see volatile revenue and earnings due to short-term market and economic downturns, it also gives Bank of America greater diversification, including exposure to faster-growing emerging markets.

And given that markets and the global economy rise over time, this means a much longer growth runway than many rival banks, such as Wells Fargo (NYSE:WFC), which is pretty much a pure play US bank with minimal exposure to investment markets.

Metric Q1 2016 Q1 2017 YoY Change
Tangible Book Value Per Share $16.19 $17.23 6.4%
Efficiency Ratio 70.5% 66.2% -6.2%
Net Interest Margin 2.33% 2.39% 2.6%
Return On Assets 0.64% 0.88% 37.5%
Return On Common Tangible Equity 7.33% 10.28% 40.2%
Net Margin 14.5% 19.6% 34.9%
Fully Phased In CET1 10.1% 11.0% 8.9%

(Source: Q1 2017 Earnings Supplement)

More important to long-term investors is certain key metrics that tell us Bank of America continues to steadily improve the efficiency and quality of its operations.

For example, the bank’s tangible book value per share growth was…

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