Bank of America Looking Like A Day Trader's Stock
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite being one of the largest banks in the United States with total assets of $2.34 trillion, Bank of America's (NYSE: BAC) stock price has been quite volatile lately. The stock has a beta ratio of 1.81. It seems that investors like Bank of America's low stock price (price to book ratio 0.36), but worry about its declining revenues.
Analyzing Bank of America's future earnings is difficult. In the first quarter of 2012, the bank took a loan loss write-off of $2.4 billion. The bad loans were primarily the result of the subprime mortgage portfolio that Bank of America took over when it purchased Countrywide in 2008. If the economy continues to improve, the amount of the loan loss write-offs should continue to decrease.
On the other hand, Bank of America's revenues have been steadily decreasing. The bank which had revenues of $87.3 billion in 2007, has seen revenues decrease in each of the last five years to just $66.2 billion in 2011. In the last year, revenues slipped by $2.5 billion. Onerous new federal regulations are the biggest reason for the reduction in revenues.
Last October, the Durbin rule came into effect. The Durbin rule limits the fees that banks can charge merchants when consumers use a credit card to make a purchase. "The new limit is expected to cost the "banks about $6.6 billion in revenue a year, beginning in 2012, according to Javelin Strategy and Research." Bank of America will also lose revenues as a result of recent rules, which restrict bank overdraft fees. The new rules became effective in July of 2010, and are expected to cost banks $5.6 billion per year.
In an attempt to make up for lost revenues, Bank of America proposed a $5 fee for purchases made with their debit card. However, the bank withdrew the proposal because of customer protests. It was determined that "The revenue the bank expected to raise from the debit fee was not worth the damage to its reputation". Unfortunately, Bank of America has not yet come up with any new ideas to recoup its revenue losses.
Positives for Bank of America
During the first quarter of 2012, Bank of America's stock got a lift when it agreed to pay $5.9 billion as part of a five bank $25 billion settlement. The settlement resolved lawsuits over "allegations of foreclosure abuses and misconduct in servicing home loans, according to court documents." The settlement should help to reduce concerns about the bank's legal liabilities.
Bank of America's stock got a second lift on March 13th, when news got out that it along with eighteen other banks had passed the federal stress test. When the news was released it was revealed that Bank of America had "better capital ratios under the stress test than nine of 19 banks when counting proposed dividend increases and share buybacks."
Bank of America's results were not good enough for it to raise its payouts, but its investors benefited because on that day the stock price rose by rallied 4.1%. When the results of the Federal Stress Test got out higher quality banks such as Wells Fargo (NYSE: WFC), JPMorgan Chase (JPM) and U.S. Bancorp (USB) announced that they would buyback stock and increase their dividends. Lower quality banks such as Citigroup (C) and SunTrust (STI) did not meet the needed minimum capital thresholds to buyback stocks or increase dividends.
As a result of Bank of America's mixed earnings results, the stock price has been extremely volatile. The stock performs more like a day traders stock, than a serious long term investment. Over the last 52 weeks, the stock has traded in a range of between $4.92 and $11.25. From January 3rd to March 23rd the stock price increased by 69.9%. From March 23rd to June 5th the stock price corrected and decreased by 38.5%. On the day of this writing the stock price rallied by 7.61% on extremely heavy volume.
Over the past year, Bank of America's revenues and net income have been moving lower. Over the same period of time, the stock price is down by 38.6%. However, investors that bought the stock near its one year bottom of $4.92 on December 19th, and then held on to it for the next four months made about a 100% profit. I make this point because Bank of America is more of a day traders stock than a serious long-term investment.
Banks such as Wells Fargo or U.S. Bancorp, offer investors growing revenues, along with better quality loan portfolios and higher dividend yields. For investors that are looking to make money by making quick trades, Bank of America might be a smart choice. However, long-term investors would probably be better served by buying bank stocks such as Wells Fargo or U.S. Bancorp.
BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.