The Surprising Bank Financial Pros Picked

A well-timed bet in the banking sector yielded sizable returns this year.

Many financial pros focused on larger banks during this spring’s regional banking crisis.

Bank of America (BAC) attracted more trading volume than Citigroup (C), with an average daily volume of 43 million shares compared to 15.7 million, even though the price of each stock isn’t dramatically different.

Bank stocks aren’t high growth, but BAC has been a steady performer amidst a sea of chaos.

Here’s how they did it.

Bank of America’s Business

We typically view banks as either regional or global. Bank of America is the latter.

It serves a diverse retail and commercial business through 3,900 retail financial centers and 15,000 ATMs in 35 countries around the world.

Bank of America segments its business into the following areas:

• Consumer Banking (40% of total revenues) – Encompasses all consumer and small business banking products and services, including deposits, credit and debit cards, consumer lending, preferred and small business banking, and client service.
• Global Wealth and Investment Management (GWIM) (21% of total revenues) – Offers comprehensive wealth management solutions to affluent and ultra-high-net-worth clients, as well as customized solutions for institutional clients.
• Global Banking (18% of total revenues) – Provides lending-related products, integrated working capital management, treasury solutions, underwriting, and advisory services.
• Global Markets (21% of total revenues) – Delivers sales and trading services, including research, to institutional clients across fixed-income, credit, currency, commodity, and equity businesses.

Source: BAC Q2’23 Investor Slide Deck

As rates rise, investors are worried about the health of banks’ commerical loan portfolios.

While chargeoffs and provision for credit losses have increased in recent quarters, commerical chargeoffs were lower QoQ while credit card charge offs represented the largest increase QoQ.

Source: BAC Q2’23 Investor Slide Deck

Financials

Source: Stock Analysis

Bank of America’s done a fantastic job of improving revenues and profit margins. 

The company’s also been steadily increasing its dividend and buying back shares.

Residential loans have dropped slightly YoY while overal loans and leases grew marginally.

Source: BAC Q2’23 Investor Slide Deck

Deposits have shrunk nearly every quarter for the past year with few exceptions. However, as the slide below points out, they’re much larger than the end of 2019.

Source: BAC Q2’23 Investor Slide Deck

Valuation

Source: Stock Analysis

BAC’s P/E valuation puts it at the higher end of the range, but below the best of breed JP Morgan (JPM).

However, it’s trading at a slight discount to book value, implying that investors are worried about the deposit base and/or loan portfolio.

Growth

Source: Seeking Alpha

Despite deposit declines, BAC delivered higher revenue growth last year than everyone save JPM, which acquired SVB.

It’s also expected to grow revenues at the second-highest rate in the coming year.

Averaged over three and five years, its revenue growth is above average, though Truist Financial (TFC), a regional bank, saw the most significant gains.

Profitability

Source: Seeking Alpha

Currently, BAC holds an advantage over its peers in net income margin, save for JPM.

The only concern here is the low return on assets.

Our Opinion 7/10

We’re a big fan of Bank of America. However, some caution is warranted here with deposits shrinking.

While we don’t think they’re in danger, the higher chargeoffs before a potential commercial mortgage crisis concerns us.

However, we believe it’s fairly priced and a decent long-term investment.

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