BAC Claims No-Loss Trading Days

When people think of banks, they usually think about checking accounts, deposits, and loans. 

But the world’s top banks also have trading desks. 

Take Bank of America (BAC), for example. 

In Q3 2022, its trading desk never had a day of losses. 

Moreover, 94% of trading days made over $25 million in revenue. 

That’s probably why BAC is financial pros’ third-most searched banking stock over the last month. 

But are its massive trading profits enough to make it a solid investment for you?

Bank of America’s Business

Bank of America is the second-largest publicly traded bank in the United States. 

It has $1.4 trillion in consumer deposits and 67 million consumer and small-business clients. 

And 95% of the U.S. Fortune 1000 are customers of the bank. 

The bank operates in approximately 35 countries. 

Bank of America breaks its business into the following categories: consumer banking, global wealth and investment management, global banking, and global markets. 

Its Q3 2022 net income numbers were $3.1 billion from consumer banking, $1.2 billion from global wealth and investment management, $2 billion from global banking, and $1.1 billion from global markets. 

Financials

BAC’s revenue growth has slowed over the last four years. 

In 2018, it did $91 billion in revenues. This slipped to $89 billion in 2021. 

Over the last 12 months, its revenues have stood at $91.5 billion, a sign the company is getting back on track. 

Additionally, it pays shareholders an annual dividend of $0.88 per share. 

Valuation

BAC trades at a P/E GAAP ratio of 10.7x, slightly higher than most of its competitors. 

For example, JPMorgan Chase (JPM) is at 9.8x, Wells Fargo (WFC) is at 11.2x, Citigroup (C) is at 5.8x, and HSBC Holdings (HSBC) is at 7.9x. 

BAC’s price-to-sales ratio of 3x is also higher than its competition’s. JPM’s is 2.8x, WFC’s is 2.2x, C’s is 1.1x, and HSBC’s is 2.2x.

Price-to-book (P/B) ratio is an important measure for banks. It compares a company’s share price to the book value of its loans and deposits.

BAC’s P/B ratio is cheap at 1.13x. However, except for JPM, the other competitors we’ve listed are cheaper.

Profitability

BAC’s net income margin is 29.9%, which is better than WFC’s and C’s. JPM’s 30.7% and HSBC’s 30.8% are higher but in the same ballpark.

However, BAC lags in its cash from operations, which is at $3.9 billion. JPM’s is $132.5 billion, WFC’s is $7.7 billion, C’s is $34.4 billion, and HSBC’s is $91.5 billion.

While higher interest rates will hurt most businesses, they should help BAC in the future. The company makes half its money from banking, and it should profit off the spread it lends customers money at and what it can borrow on the market. 

Management believes it can make an additional $1 billion from the third to the fourth quarter. 

Growth

All areas of BAC’s business are growing. 

For example, in Q3, it added 418,000 new checking accounts, grew average loans and leases by 18%, and increased sales and trading revenue by 13%.

Moreover, the firm’s revenues have grown year over year, something JPM, WFC, and C can’t say. 

Our Opinion 6/10

In general, bank stocks tend to underperform during high inflation. 

If inflation is mild, BAC could do very well. The company is back to its peak revenues and keeps growing. 

But if we were to buy a bank stock, it wouldn’t be BAC. 

From a valuation perspective, C and HSBC are better bargains.