Should You Invest in Bank of America Right Now?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bank of America , like its competitors, has had a real struggle getting back on track from the 2008 melt down. There are signs that the bank is making progress to turn itself around but headwinds still appear to keep it struggling more than most banks. Is it a good investment right now or will the challenges it faces break the bank up once and for all? Let’s take a look at the progress the company has made and challenges that continue to hamper its progress.
Struggle Keeping Up with Other Banks
Bank of America has not been able to get to the front of the line when we think of recovery from the financial crisis the sector went through. Honestly, it is still struggling with the credit losses and lawsuits from the Countrywide Mortgage takeover. Its journey to profitability has it cutting costs and raising capital by selling pieces of its business. As a recent example, it sold part of its “wealth management” unit outside the United States to Julius Baer who could pay up to $2 billion for it.
No matter how hard it tries to get away, Bank of America is still knee deep in mortgage related legal battles that must be factored into its budget. At the end of July, BofA was sued by 15 institutional investors from Countrywide Financial Corp. Allegations state Countrywide ignored prudent lending practices, under-provided for bad loans, and artificially boosted earnings. If you haven’t figured it out already, the $2.5 billion purchase of Countrywide by Bank of America led to the beginning of all of BAC’s legal problems to date!
Will Bank of America Survive LIBOR
The LIBOR rate-fixing scandal has knocked on the doors of Bank of America along with 16 other banks. It received a subpoena and Request for Information from the U.S. Department of Justice regarding their role in the scandal. The Libor fraud lowered the interest rate and correspondingly decreased the interest payments Barclays received from customers. Named in the lawsuit along with Bank of America are Citigroup (NYSE: C) and Barclays (NYSE: BCS) and investors have also filed suit against these banks claiming lost money because of the scandal. Maybe it is because of size, maybe for another reason; but Bank of America has not been able to rebound since 2008 as well as other banks. Will this LIBOR scandal undue the stock? Competitors like Citigroup and JPMorgan have been able to at least get close to their 2008 levels, but BofA is still down over 75% from its 2007 highs.
In Defense of Bank of America
On the positive side of things, there is a tangible track record of good progress for Bank of America making things right and returning to profitability. It is decreasing bad debt on a yearly basis.
- In 2009 Bank of America’s bad debt write off was $48.5 billion.
- It decreased to $28.4 billion in 2010
- And finally to $13.4 billion in 2011
This is a good progressive write down, but investors are still unsure of its debt weight. There seems to be some shades of grey around its actual balance sheet that continues to trouble investors.
The bank had one of its better quarterly performances as of late with earnings of just under $2.5 billion. Improvement in credit lending and an aggressive cost cutting plan helped it balance out lower revenues this quarter from the global slowdown. This is better but the mortgage portfolio continues to weigh on the stock with investors and will for the near future. Project BAC is a two-phased multi-year plan – to remake the company and rein in costs. 30,000 jobs are to be cut of which 12,000 have already been done.
As part of a $25 billion settlement agreement to resolve lawsuits over faulty foreclosures and shoddy handling of loan request modification, Bank of America agreed to pay $5.9 billion. As a beginning, this should help make the bank’s legal concerns and responsibilities more transparent to investors. It is also another step toward bringing the subprime fiasco to an end.
Bank of America was one of 19 banks that passed the Federal Government’s stress test. Passing the stress test, the bank’s earnings are unlikely to improve because it has been unable to resolve the problems that it has as a result of decreasing revenues and the large debt liability. But, like the $5.9 billion settlement, it is a start in the right direction.
Struggling finding Revenue through Fees
It seems that the gods are against Bank of America no matter what the bank tries to do. With a reduction in revenues and net income, it has looked for ways to make up losses. Federal regulations (and they are needed) have challenged the bank. An October 2011 regulation limits fees banks can levy against merchants who swipe cards. This brings a $6.6 billion loss in revenue. Prior to this, it took a $5.6 billion loss from laws restricting overdraft fees. So Bank of America tried to impose a $5.00 fee for those who purchased with the debit card. There was such a negative outcry from customers that it rescinded the idea. The struggle continued to play havoc in its reputation.
One can see progress year by year with the bank digging itself out of its struggle. The Countrywide Mortgage purchase was a huge setback, and appears to have an end. But the new LIBOR problem is going to mean another huge financial challenge that has yet to be totally felt or known. Is Bank of America going to make it as a company or will it eventually break up into smaller banks? I cannot answer this last question. But as an investor, I am uncomfortable putting my money somewhere that I am uncertain about the future of the stock at this point. Until the LIBOR predicament finds an end, I would not place my money here.
johnmylant has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and Citigroup Inc. 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.